Financial Accounting - Inventory and Cost of Goods Sold

These flashcards cover key vocabulary terms and concepts related to inventory and cost of goods sold in financial accounting, aiding in the understanding of inventory valuation methods and reporting.

Inventory

Items a company intends for sale to customers in the ordinary course of business, including not yet finished products, reported as a current asset.

Cost of Goods Sold (COGS)

The expense account reported in the income statement that represents the cost of inventory sold during the period.

FIFO (First-In, First-Out)

An inventory cost flow assumption that assumes the first units purchased are the first ones sold.

LIFO (Last-In, First-Out)

An inventory cost flow assumption that assumes the last units purchased are the first ones sold.

Weighted-Average Cost

An inventory costing method that averages the cost of goods available for sale and assigns that average to both COGS and ending inventory.

Multiple-Step Income Statement

A type of income statement that reports multiple levels of profitability including gross profit and operating income.

Perpetual Inventory System

An inventory system that keeps a continual record of inventory on hand and inventory purchased and sold.

Periodic Inventory System

An inventory system that does not continually record inventory amounts but periodically adjusts these at the end of a reporting period based on a physical count.

Net Realizable Value (NRV)

The estimated selling price of inventory minus any costs of completion, disposal, and transportation.

Inventory Turnover Ratio

Shows the number of times a company sells its average inventory balance during a reporting period.

Gross Profit Ratio

Indicates the company's successful management of inventory by measuring the amount by which the sale price of inventory exceeds its cost per dollar of sales.

LIFO Reserve

The difference that must be reported by companies using LIFO, reflecting what the inventory amount would have been using FIFO.

Ending Inventory

The cost of inventory that has not yet been sold at the end of the reporting period.

Service Companies

Companies that record revenues when providing services to customers, as opposed to selling inventory.

Freight-In Charges

Costs associated with transportation of inventory to the purchasing company, which are added to inventory.

Purchase Discounts

Reductions in the purchase price of inventory granted by sellers for prompt payment.

Purchase Returns

Inventory that is returned to the seller for being unwanted or defective.

Common Mistake

A frequent error in accounting practices, such as using incorrect inventory flow assumptions for calculations.

Inventory Cost Methods

The various ways a company can account for inventory costs, including FIFO, LIFO, and weighted-average.

Accounting for Inventory Errors

The process of recognizing how errors in inventory counts affect financial statements and reporting.