Chapter 7: Inventory and Cost of Goods Sold

VOCAB

Average Cost Method

Uses the weighted average unit cost of the goods available for sale for both cost of goods sold and ending inventory.

Cost of Goods Sold Equation

BI + P - EI = CGS.

Direct Labor

The earnings of employees who work directly on the products being manufactured.

Factory Overhead

Manufacturing costs that are not raw material or direct labor costs.

Finished Goods Inventory

Manufactured goods that are complete and ready for sale.

First-In, First-Out (FIFO) Method

An inventory costing method that assumes the first goods purchased (the first in) are the first goods sold.

Goods Available for Sale

The sum of beginning inventory and purchases (or transfers to finished goods) for the period.

Inventory

Tangible property held for sale in the normal course of business or used in producing goods or services for sale.

Last-In, First-Out (LIFO) Method

An inventory costing method that assumes that the most recently purchased units (the last in) are sold first.

LIFO Reserve

A contra-asset for the excess of FIFO over LIFO inventory.

Lower of Cost or Net Realizable Value

Valuation method departing from the cost principle; it serves to recognize a loss when net realizable value drops below cost.

Merchandise Inventory

Goods held for resale in the ordinary course of business.

Net Realizable Value (NRV)

The expected sales price less selling costs (e.g., repair and disposal costs).

Periodic Inventory System

An inventory system in which ending inventory and cost of goods sold are determined at the end of the accounting period based on a physical inventory count.

Perpetual Inventory System

An inventory system in which a detailed inventory record is maintained, recording each purchase and sale during the accounting period.

Purchase Discount

Cash discount received for prompt payment of an account.

Purchase Returns and Allowances

A reduction in the cost of purchases associated with unsatisfactory goods.

Raw Materials Inventory

Items acquired for the purpose of processing into finished goods.

Specific Identification Method

An inventory costing method that identifies the cost of the specific item that was sold.

Work in Process Inventory

Goods in the process of being manufactured.