Financial Accounting MIDTERM

the formula for COGS

beginning inventory + purchases = goods available – ending inventory= cost of goods sold

perpetual inventory system: records cost of goods sold at the time of each sale.

Periodic inventory system: records cost of goods sold at the end of the period.

Freight in: inventory cost

Freight out: selling expense

FOB point (free on board): point of transfer

Goods in transit: FOB shipping point and Fob destination

FOB shipping point: buyer accepts ownership when the goods depart the seller’s place of business

FOB destination: ownership of goods transfers to the buyer when the goods arrive at the buyer’s place of business

Merchandise inventory: includes all goods that a company owns and holds for sale regardless of where the goods are located when inventory is counted.

Goods on consignment: goods sent by the owner/consignor, to another party/consignee

Consignee: sells goods for the owner

Consignor: owns the consigned goods and reports them in its inventory

Goods damaged or obsolete: damaged, out of date, and deteriorated goods are not reported in inventory if they cannot be sold. Sold at lower price, they are included in inventory at net realizable value.

Net realizable value: sales price - the cost of making the sale

Inventory cost: invoice cost – discounts + other costs(shipping, storage, import duties, insurance)

Inventory cost methods: four methods used to assign costs to inventory and to cost of goods sold

Special identification (SI): when each item in inventory can be matched with a specific purchase and invoice. Use this to assign cost

First-in, first-out (FIFO): assumes that inventory items are sold in the order acquired. Earliest units cost= cost of goods sold, cost from most recent purchase= ending inventory

Last-In, First-out (LIFO): assumes that the most recent purchases are sold first. Recent costs= cost of goods sold, cost of earliest purchases= ending inventory

Weighted average (WA): (also called average cost) requires that we use the weighted average cost per unit of inventory at the time of each sale.

LIFO conformity rule: requires a business using this method for federal income tax reporting but also when preparing financial statements for shareholders, investors, and creditors