Financial Accounting - McGraw-Hill, 8th Edition: Chapter 6

Cost of Goods Sold

Cost of inventory the business has sold to customers. (Income Statement)

Cost of Goods Sold Model

Beginning Inventory + Purchases = Goods Available - Ending Inventory = Costs of Goods Sold. (The cost of inventory that was purchased to sell and was actually sold)

FIFO

First In First Out (Lowest Cost of Goods Sold)

LIFO

Last In First Out (Highest Cost of Goods Sold)

Gross Profit

Sales revenue - Cost of Goods Sold. "Gross Margin"

Goods Available for Sale (GAS)

Cost of Goods Sold + Ending Inventory.

Periodic Inventory System

Physical count of the inventory on hand at the end of the period.

Perpetual Inventory System

System in which the business keeps a continuous record for each inventory item to show the inventory on hand at all times. (By the calendar)

Average Cost Method (Weighted- Average Method)

Inventory method costing method, based on the average cost of inventory during the period

Conservatism

Concept by which the least favorable figures are presented in the financial statements

Merchandiser Formula

Revenue - Cost of Goods Sold = Gross Profit - Operating Expenses = Net Income (Multiple step income statement used by merchandisers)

Merchandise Inventory

An asset that is listed as a current asset on the Merchandiser's Balance Sheet.

Ending Inventory Model

Ending Inventory= (Beginning Inventory + Purchases) Goods Available for Sale- Cost of Goods Sold.

Overstated Gross Profit

Ending Inventory- Too High

(Subtract difference of overstated amount)

Understated Gross Profit

Ending Inventory- Too Low

(Add difference of understated amount)

Weighted Average Unit Cost (Average unit cost)

GAS/ Units available for sale

Cost of Goods Sold

Weighted Average Unit Cost x Units Sold = Ending Inventory

Cost of Goods Available

Beginning Inventory + Net Purchases = Cost of Goods Available

Net Income

Gross Profit - Operating Expense = Net Income

Consistency Principle

A business must use the same accounting methods and procedures, from period to period

Disclosure Principle

A businesses' financial statements must report enough information for outsiders to make knowledgeable decisions about the business.

Gross Profit Method

(A way to estimate inventory, based on a re-arrangment of the "cost-of-goods-sold model")

Beginning Inventory + Net purchases = Goods Available - Cost of Goods Sold = Ending Inventory

Inventory Turnover

Ratio of cost goods sold to average inventory. Indicates how rapidly inventory is sold

Lower-of-Cost-or-Market (LCM) Rule

Requires that an asset an asset be reported in the financial statements at whichever is lower, its historical cost, or its market value