Valuation of Inventories - Chapter 7

Inventory

Assets held for sale or goods used for production.

Merchandising Companies

Companies that have one inventory account and the inventory is ready for sale.

Inventory Account

Includes raw materials, work in process, and finished goods.

Cost of Goods Sold (COGS)

Calculated as: Beginning Inventory + Purchases - Ending Inventory.

Perpetual System

Inventory system where purchases are continuously recorded in inventory.

Periodic System

Inventory system where inventory on hand is determined at specific intervals.

FOB Shipping Point

Transfer of ownership occurs when the buyer pays for shipping costs.

FOB Destination

Seller pays the freight cost and ownership passes to the buyer upon delivery.

Product Cost vs Period Cost

Product cost is directly tied to acquiring goods; period cost is indirectly related.

Specific Identification

Inventory method used for distinct items that can easily be identified.

FIFO (First-In, First-Out)

Assumes goods are sold in the order they are purchased.

LIFO (Last In, First Out)

Matches the cost of the last goods purchased against revenue.

LIFO Reserve

Difference between the inventory method used for internal reporting and LIFO.

Purchase Discount Gross Method

Purchases and payables recorded at invoice price.

Purchase Discount Net Method

Purchases and accounts payable recorded at invoice price less expected discounts.