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Vocabulary flashcards covering key terms and concepts from Chapter 6, including inventory types, cost flow models, inventory systems, costing methods, valuation rules, and analytical ratios.
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Inventory
Products held for resale; reported as a current asset until sold.
Cost of Goods Sold (COGS)
Expense representing the cost of inventory sold during a period.
Gross Margin (Gross Profit)
Revenue minus cost of goods sold; measures ability to cover operating expenses.
Merchandiser
Company that buys finished goods for resale (retailer or wholesaler).
Retailer
Merchandiser that sells directly to consumers.
Wholesaler
Merchandiser that sells to other retailers.
Manufacturer
Company that converts raw materials into finished products for sale.
Raw Materials Inventory
Basic inputs awaiting production in a manufacturing firm.
Work-in-Process Inventory
Goods in production consisting of raw materials, direct labour, and overhead.
Finished Goods Inventory
Completed products ready for sale by a manufacturer.
Cost of Goods Available for Sale
Beginning inventory plus purchases (or production) during the period.
Cost of Goods Sold Model
Beginning Inventory + Purchases – Ending Inventory = COGS.
Perpetual Inventory System
Continuously updates inventory and COGS with each purchase and sale.
Periodic Inventory System
Updates inventory and determines COGS only at period-end via physical count.
Just-in-Time (JIT) Inventory
Inventory management system aiming to receive goods only as needed to minimize carrying costs.
Purchase Discount
Price reduction offered for prompt payment (e.g., 2/10, n/30).
Purchase Return
Goods returned to supplier for credit or cash refund.
Purchase Allowance
Seller-granted price reduction for kept but unsatisfactory goods.
Freight-in
Transportation cost paid by buyer; added to cost of inventory (FOB shipping point).
Freight-out
Transportation cost paid by seller; recorded as selling expense (FOB destination).
FOB Shipping Point
Ownership transfers to buyer at shipment; buyer pays freight, revenue recognized at shipment.
FOB Destination
Ownership transfers at delivery; seller pays freight, revenue recognized at delivery.
Consignment
Goods owned by consignor but held and sold by consignee for a fee.
Specific Identification Method
Assigns actual cost of each identified unit to COGS or ending inventory.
First-In, First-Out (FIFO)
Assumes earliest costs are the first costs transferred to COGS; newest costs remain in inventory.
Weighted Average Cost (Moving Average)
Allocates costs using average cost per unit recalculated after each purchase.
Inventory Costing Method
Rule (Specific ID, FIFO, Weighted Avg) used to allocate costs between COGS and ending inventory.
Lower of Cost and Net Realizable Value (LCNRV)
Inventory reported at the lower of historical cost or estimated selling price minus disposal costs.
Net Realizable Value (NRV)
Expected selling price of inventory less estimated costs to sell or complete.
Gross Profit Ratio
Gross profit ÷ Net sales; indicates margin on sales.
Inventory Turnover Ratio
COGS ÷ Average inventory; measures how many times inventory is sold during a period.
Average Days to Sell Inventory
365 ÷ Inventory turnover; average number of days items remain in inventory.
Inventory Error – Understatement
Current period assets & net income understated; opposite effects next period.
Inventory Error – Overstatement
Current period assets & net income overstated; opposite effects next period.
Purchase Account (Periodic)
Temporary account accumulating inventory purchases during the period.
Purchase Discounts Account (Periodic)
Temporary account tracking cash discounts taken on purchases.
Purchase Returns & Allowances Account (Periodic)
Temporary account recording cost of returns or allowances.
Transportation-in Account (Periodic)
Temporary account accumulating freight-in costs.
Moving-Average Cost per Unit
(Cost of goods available ÷ Units available) recomputed after each purchase under perpetual weighted average.
Factory Overhead
Indirect production costs included in work-in-process (e.g., utilities, depreciation).
Direct Labour
Labour costs traceable to converting raw materials into finished goods.
Income Tax Effect of Costing Methods
FIFO yields higher taxable income in rising prices; choice affects timing, not total amount, of taxes.
Inventory Carrying Costs
Expenses such as financing, storage, insurance, and obsolescence risk linked to holding inventory.
Freight Terms Impact on Revenue Recognition
Under FOB shipping point, revenue recognized at shipment; under FOB destination, at delivery.
Gross Profit Method (Estimate)
Uses historical gross profit ratio to estimate ending inventory for interim reporting.
IAS 2 / Section 3031
IFRS and ASPE standards governing inventory measurement and disclosure; largely converged.