Chapter 6 Key Points: Inventory and Cost of Goods Sold

Flashcards covering key vocabulary and concepts related to inventory management and cost of goods sold from Chapter 6.

Cost of Goods Sold (COGS)

An expense reported in the income statement representing the cost of inventory sold during the period.

FIFO (First-In, First-Out)

An inventory cost flow assumption where the first units purchased are assumed to be the first ones sold.

LIFO (Last-In, First-Out)

An inventory cost flow assumption where the last units purchased are assumed to be the first ones sold.

Average Cost Method

An inventory cost method that assumes both COGS and ending inventory consist of a random mixture of all goods available for sale.

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

An accounting rule requiring companies to report inventory at the lower of its cost or its market value.

Perpetual Inventory System

A system that maintains a continual record of inventory purchased and sold.

Periodic Inventory System

A system that periodically adjusts inventory amounts at the end of the reporting period based on a physical count.

Inventory Turnover Ratio

A ratio indicating how many times a firm sells its average inventory balance during a reporting period.

Gross Profit Ratio

A measure of how much the sale price of inventory exceeds its cost per dollar of sales.

Inventory Errors

Mistakes in estimating inventory that can affect the financial statements, impacting net income and retained earnings.