Term
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Definition
| an inventory costing method that uses the weighted average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold |
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| goods held for sale by one party although ownership of the goods is retained by another party |
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| the cost of purchasing the same goods at the present time from the usual suppliers in the usual quantities |
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Definition
measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover ratio
- days in inventory = 365/inventory turnover ratio |
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Definition
| manufactured items that are completed and ready for sale |
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Term
| first-in, first-out (FIFO) method |
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Definition
| an inventory costing method that assumes that the earliest goods purchased are the first to be sold |
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Term
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Definition
| Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer |
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Term
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Definition
| Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller |
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Term
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Definition
a ratio that measures the liquidity of inventory by measuring the number of times average inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period
- Inventory turnover ratio = cost of goods sold/Average inventory |
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Term
| Just-in-time (JIT) inventory |
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Definition
| inventory system in which companies manufacture or purchase goods just in time for use |
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Term
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Definition
| for a company using LIFO, the difference between inventory resported using LIFO and inventory using FIFO |
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| lower-of-cost-or-market (LCM) |
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Definition
a basis whereby inventory is stated at the lower of either its cost or its market value as determined b current replacement cost
- example of the concept of CONSERVATISM, meaning that the best choice among accounting alternatives is the method least likely to overstate assets and net income |
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Term
| specific identification method |
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Definition
| an actual physical flow costing method in which items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory |
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Term
| weighted average unit cost |
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Definition
| average cost that is weighted by the number of units purchased at each unit cost |
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Term
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Definition
| that portion of manufactured inventory that has begun the production process but is not yet complete. |
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Term
| descrive the steps in determining inventory quantities |
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Definition
| the steps are (1) take a physical inventory of goods on hand and (2) determine the ownership of goods in transit or on consignment. |
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Term
| explain the basis of accounting for inventories and apply the inventory cost flow method under a periodic inventory system |
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Definition
| the primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale. Cost of goods available for sale includes (a) cost of beginning inventory and (b) cost of goods purchased. The inventory cost flow methods are: specific identification and three assumed cost flow methods--FIFO LIFO and average cost. |
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| explain the financial statement and tax effects of each of the inventory cost flow assumptions |
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Definition
| the cost of goods available for sale may be allocated to cost of goods sold and ending inventory by specific identification or by a method based on an assumed cost flow. When prices are rising, the first-in, first-out (FIFO) method results in lower cost of goods sold and a higher net income than the average cost and the LIFO method. the reverse is true when prics are falling. In the balance sheet, FIFO results in an ending inventory that is closest to current value, whereas the inventory under LIFO is the farthest from current calue. LIFO results in the lowest income taxes (because of lower taxable income) |
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| explain the lower-of-cost-or-market basis of accounting for inventories. |
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Definition
| Companies use the LCM basis when the current replacement cost (market is less than cost. Under LCM, companies recognize the loss in the period in which the price decline occurs. |
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Term
| compute and interpret the inventory turnover ratio |
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Definition
| the inventory turnover ratio is calculated as cost of goods sold divided by average inventory. It can be converted to average days in inventory by dividing 365 days by the inventory turnover ratio. A higher turnover ratio or or lower average days in inventory suggest that management is trying ti keep inventory levels low relative to its sales level |
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Term
| apply the inventory cost flow methods to perpetual inventory records |
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Definition
| under FIFO, the cost of the earliest goods on hand prior to each sale is charged to cost of goods sold. Under LIFO, the cost of the most recent purchase prior to sale is charged to cost of goods sold. Under the average-cost method, a new average cost is computed after each purchase. |
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Term
| In PERPETUAL system, companies must take physical inventory for 2 purposes: |
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Definition
1) checking the accuracy of their perpetual inventory records
2) to determine the amount of inventory lost due to wasted raw materials, shoplifting, or employee theft |
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Term
| In PERIODIC system, companies must take physical inventory for 2 different purposes: |
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Definition
1) Determine the inventory on hand at the balance sheet date
2) determine the cost of goods sold for the period |
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