Accounting 101-Chapter 5 Inventories and Cost of Goods Sold
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The account wholesalers and retailers use to report inventory held for resale
The inventory of a manufacturer before the addition of any direct labor or manufacturing overhead.
Work in Process
The cost of unfinished products in a manufacturing company.
A manufacturer's inventory that is complete and ready for sale.
Net sales less cost of goods sold.
Sales revenue less sales returns and allowances and sales discounts.
A representation of the inflow of assets.
Sales Returns and Allowances
Contra-revenue account used to record refunds to customers and reductions of their accounts.
A contra-revenue account used to record discounts given to customers for early payment of their accounts.
Cost of goods available for sale
Beginning inventory plus cost of goods purchased.
Cost of goods sold
Cost of goods available for sale minus ending ending inventory.
A system in which the inventory account is increased at the time of each purchase and decreased at the time of each sale.
A system in which the Inventory account is updated only at the end of the period.
An adjunct account used to record freight cost paid by the buyer.
An account used in periodic inventory system to record acquisitions of merchandise.
Purchase Returns and Allowances
A contra-purchases account used in a periodic inventory system when a refund is received from a supplier or a reduction is given in the balance owed to a supplier.
A contra-purchases account used to record reductions in purchase price for early payment to a supplier
FOB destination point
Terms that require the seller to pay for the cost of shipping the merchandise to the buyer.
FOB shipping point
Terms that require the buyer to pay for the shipping costs.
Gross Profit Ratio
Gross Profit/Net Sales
Is an important measure of profitability. It indicates a company's ability to cover operating expenses and earn a profit.
Specific Identification Method
An inventory costing method that relies on matching unit costs with the actual units sold.
Weighted average cost method
An inventory costing method that assigns the same unit cost to all units available for sale during the period.
Cost of Goods Available for Sale/Units Available=Weighted Average Cost
Ending inventory is found by multiplying the weighted average unit cost by the number of units on hand.
Cost of Goods Sold
Can be calculated in one of two ways.
Cost of goods available for sale-Ending inventory.
Weighted Average Cost X Number of Units Sold
An inventory costing method that assigns the most recent costs to ending inventory.
To calculate ending inventory using FIFO start with the most recent inventory acquired and work backward.
To calculate cost of goods sold, start with the beginning inventory and work forward.
An inventory method that assigns the most recent costs to cost of goods sold.
To calculate ending inventory using LIFO start with the beginning inventory and work forward.
To calculate cost of goods sold, start with the most recent purchases and work backwards.
The result of selling more units than are purchased during the period,which can have negative tax consequences if a company is using LIFO
The excess of the value of a company's inventory stated at FIFO over the value stated at LIFO
The current cost of a unit of inventory
The portion of the gross profit that results from holding inventory during a period of rising prices.
Lower-of-cost-or-market (LCM) rule
A conservative inventory valuation approach that is an attempt to anticipate declines in the value of inventory before its actual sale.
Inventory turnover ratio
A measure of the number of times inventory is sold during the period.
Cost of Goods Sold/Average Inventory
Number of days' sales in inventory
A measure of how long it takes to sell inventory
Number of days in the period/Inventory Turnover Ratio
The name given to an average cost method when a weighted average cost assumption is used with the perpetual inventory system.
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