Financial Accounting - Reporting and Analyzing Inventory

Flashcards covering key concepts of financial accounting regarding inventory reporting and analysis.

Expense Recognition

Expenses are recognized when assets are diminished or liabilities increase as a result of earning revenue.

Direct Association

Cost directly linked to a specific source of revenue, recognized when the revenue is recognized.

Systematic Allocation

Costs that benefit more than one accounting period and are capitalized as an asset and expensed over its useful life.

Immediate Recognition

Costs associated with the revenues of an accounting period, but not tied to specific sales transactions, recognized in the period incurred.

Cost of Goods Sold (COGS)

The cost that is transferred from inventory to an expense when goods are sold, often subtracted from sales revenue to determine gross profit.

FIFO (First-in, First-out)

Inventory costing method that assumes the oldest inventory costs are the first to be transferred to cost of goods sold.

LIFO (Last-in, First-out)

Inventory costing method that assumes the most recent inventory costs are the first to be transferred to cost of goods sold.

Average Cost Method

Inventory costing method that uses the average cost of all inventory items to determine cost of goods sold.

Lower of Cost or Net Realizable Value (LCNRV)

Inventory is reported at the lower of its cost or its net realizable value, which must be written down if the net realizable value is lower.

Gross Profit Margin

A measure of a company's financial health calculated as gross profit divided by sales revenue, indicating the percentage of revenue that exceeds the cost of goods sold.

Inventory Turnover Ratio

A ratio that shows how many times a company's inventory is sold and replaced over a period, calculated as cost of goods sold divided by average inventory.

Inventory Days Outstanding

The number of days it takes for a company to sell its entire inventory during a given period, calculated based on average inventory and average daily cost of goods sold.