Chapter 6: Inventories

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  1. Average-Cost Method
    Inventory costing method that assumes both cost of goods sold and ending inventory consist of a random mixture of all the goods available for sale.
  2. Consigned Goods
    Goods held for sale by one party although ownership of the goods s retained by another party.
  3. Consistency Concept
    Dictates that a company use the same accounting principles and methods from year to year.
  4. Current Replacement Cost
    The current cost to replace an inventory item.
  5. Days in Inventory
    Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover.
  6. Finished Goods Inventory
    Manufactured items that are completed and ready for sale.
  7. First-in, first-out (FIFO) method
    Inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.
  8. FOB (free on board) destination
    Freight terms indicating that ownership of the goods remains with the seller until the goods reach the buyer.
  9. FOB (free on board) Shipping Point
    Freight terms indicating that ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
  10. Gross Profit Method
    A method for estimating the cost of the ending inventory by applying a gross profit rate to net sales and subtracting estimated cost of goods sold from cost of goods available for sale.

    *Gross Profit= Net Sales - Cost of Goods Sold
  11. Inventory Turnover
    A ratio that measure the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the average inventory during the period.

    *Inventory Turnover Ratio Equation= Cost of goods sold / average inventory
  12. Just-intime (JIT) inventory
    Inventory system in which companies manufacture or purchase goods only when needed for use.
  13. Last-in, first-out (LIFO) method
    Inventory costing method that assumes the cost of the latest units purchased are the first to be allocated to cost of goods sold.
  14. Lower-of-Cost-or-Market (LCM)
    Rules where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost.
  15. Moving Average Method
    A new average is computed after each purchase, by dividing the cost of goods available for sale by the units on hand.
  16. Raw Materials
    Basic goods that will be used in production but have not yet been placed into production.
  17. Retail Inventory Method
    A method for estimating the cost of the ending inventory by applying cost-to-retail ratio to the ending inventory at retail.
  18. Specific Inventory Method
    An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
  19. Weighted-acerage Unit Cost
    Average cost that is weighted by the number of units purchased at each unit cost.
  20. Work in process
    That portion of manufactured inventory that has been placed into production process but is not yet complete.
  21. Freight-In
    Cost to transport inventory to the company, which is included as part of inventory cost.
  22. Freight-Out
    Cost of freight on shipments to customers, and is included as a selling expense rather than part of the inventory costs.
  23. Income Before Income Taxes
    Income Before Income Taxes = = Operating income + nonoperating revenues - nonoperating expenses
  24. Net Income
    Net Income= All revenues - all expenses
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Chapter 6: Inventories
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6.1 Discuss how to classify and determine inventory. 6.2 Apply inventory cost flow methods and discuss their financial effects. 6.3 Indicate the effects of inventory errors on the financial statements. 6.4 Explain the statement presentation and analysis of inventory.
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