Ch 6 Inventory and Cost of Goods Sold

Inventory

Items a company intends for sale to customers in the ordinary course of business.

Cost of Goods Sold (COGS)

An expense reported in the income statement that represents the cost of goods sold.

Gross Profit

Equals net revenues or net sales minus cost of goods sold.

Operating Income

Equals gross profit minus operating expenses.

Income Before Income Taxes

Equals operating income plus nonoperating revenues and minus non-operating expenses.

Net Income

Equals all revenues minus all expenses.

Specific Identification

A method that matches each unit of inventory with its actual cost.

First In, First Out (FIFO)

An inventory method that assumes units purchased are the first ones sold.

Weighted Average Cost

An inventory method that assumes each unit has a cost equal to the weighted average unit cost of all inventory items.

LIFO

An inventory method where the cost of goods sold reflects the current cost.

LIFO Conformity Rule

Companies that use LIFO for tax reporting must also use LIFO for financial reporting.

Perpetual Inventory System

Maintains a continual record of inventory on hand and inventory purchased and sold.

Periodic Inventory System

Calculates the balance of inventory at the end of the period based on a physical count.

LIFO Adjustment

An adjustment to convert inventory records from FIFO to LIFO basis at the end of the year.

FOB Shipping Point

Means the title passes when the seller ships the inventory.

FOB Destination

Means the title passes when the inventory reaches the buyer's destination.

Purchase Discounts

Discounts offered by the seller to the buyer for quick payment.

Purchase Returns

When a buyer returns unwanted or defective inventory.

Ending Inventory

Reflects the current cost of inventory on the balance sheet.

Balance Sheet Approach

An approach where the ending inventory reflects the latest costs.

Income Statement Approach

An approach relating to inventory costing impacting the income statement.