Chapter 6 Vocab

Average-cost method

An inventory costing method that uses the weighted-average unit cost to allocate the cost of goods available for sale to ending inventory and cost of goods sold.

Consigned goods

Goods held for sale by one party although ownership of the goods is retained by another party.

Consistency concept

Companies use the same accounting principles and methods from year to year.

Days in inventory

Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover.

Finished goods inventory

Manufactured items that are completed and ready for sale.

First-in, first-out (FIFO) method

An inventory costing method that assumes that the earliest goods purchased are the first to be sold.

FOB destination

Freight terms indicating that ownership of goods remains with the seller until the goods reach the buyer.

FOB shipping point

Freight terms indicating that ownership of goods passes to the buyer when the public carrier accepts the goods from the seller.

Inventory turnover

A ratio that indicates the liquidity of inventory by measuring the number of times average inventory is sold during the year; computed by dividing cost of goods sold by the average inventory.

Just-in-time (JIT) inventory

Inventory system in which companies manufacture or purchase goods only when needed.

Last-in, first-out (LIFO) method

An inventory costing method that assumes that the latest goods purchased are the first to be sold.

LIFO reserve

For a company using LIFO, the difference between inventory reported using LIFO and inventory using FIFO.

Lower-of-cost-or-net realizable value (LCNRV)

A basis whereby inventory is stated at the lower of either its cost or its net realizable value.

Moving-average method

Perpetual inventory method where the company computes a new average cost after each purchase by dividing the cost of goods available for sale by the units on hand.

Net realizable value

The estimated selling price in the normal course of business, less estimated costs to complete and sell.

Raw materials

Basic goods that will be used in production but have not yet been placed in production.

Specific identification method

An actual physical-flow costing method in which particular items sold and items still in inventory are specifically costed to arrive at cost of goods sold and ending inventory.

Weighted-average unit cost

Average cost that is weighted by the number of units purchased at each unit cost.

Work in process

That portion of manufactured inventory that has begun the production process but is not yet complete.