Ch. 5 INVENTORIES AND COST OF SALES

Goods in Transit

Goods in Transit

Goods that are included in the purchaser's inventory if ownership has passed to the purchaser, determined by shipping terms.

FOB Destination

Goods included in buyer's inventory after arrival at their destination.

FOB Shipping Point

Goods included in buyer's inventory once they are shipped.

Goods on Consignment

Goods shipped by the consignor to the consignee, with the consignor retaining ownership and reporting in its inventory.

Net Realizable Value

Sales price of damaged or obsolete goods minus the cost of making the sale.

Expense Recognition Principle

Inventory costs are expensed as cost of goods sold when inventory is sold.

Physical Count

Inventory count taken to adjust the Inventory account balance to actual inventory on hand.

Perpetual System

Inventory system where Merchandise Inventory is updated for each purchase and sale.

First-In, First-Out (FIFO)

Inventory costing method assuming costs flow in the order incurred.

Last-In, First-Out (LIFO)

Inventory costing method assuming costs flow in the reverse order incurred.

Weighted Average

Inventory costing method assuming costs flow in an average of the costs available.

Specific Identification

Inventory costing method where each item is identified with a specific purchase and invoice.

Lower of Cost or Market (LCM)

Inventory valuation method reporting at the lower of cost or market value.

Replacement Cost

Market value for LIFO method in Lower of Cost or Market (LCM) valuation.

Income Statement Effects

Misstatements in cost of goods sold, gross profit, and net income due to inventory errors.

Ending Inventory Understated

Results in overstated cost of goods sold and understated net income.

Beginning Inventory Understated

Leads to understated cost of goods sold and overstated net income.

Ending Inventory Overstated

Causes understated cost of goods sold and overstated net income.

Beginning Inventory Overstated

Results in overstated cost of goods sold and understated net income.

Inventory Turnover

Measures the number of times a company's average inventory was sold during an accounting period.

Days' Sales in Inventory

Measures the adequacy of inventory to meet sales demand by calculating how many days it will take to convert inventory into accounts receivable or cash.

Financial Statement Effects of Costing Methods

Different costing methods like FIFO, LIFO, Weighted Average, and Specific Identification have varying impacts on gross profit, net income, and balance sheet values.

Retail Inventory Method

Estimates ending inventory using a three-step process based on goods available for sale at retail and cost-to-retail ratio.

Gross Profit Method

Estimates cost of ending inventory by applying the gross profit ratio to net sales at retail, often used in cases of inventory loss or damage.