Chapter 06 - Inventory and Cost of Goods Sold

A set of vocabulary flashcards based on Chapter 06 - Inventory and Cost of Goods Sold, outlining key terms and their definitions.

Inventory

An asset that represents goods a company has available for sale to customers.

Cost of Goods Sold (COGS)

An expense representing the costs of acquiring or manufacturing the goods that a company sells during a specific period.

FIFO (First-In, First-Out)

An inventory valuation method where the oldest inventory items are recorded as sold first.

LIFO (Last-In, First-Out)

An inventory valuation method where the most recently purchased inventory items are recorded as sold first.

Weighted-Average Cost

An inventory valuation method that calculates the cost of inventory based on the average cost of all similar items.

Perpetual Inventory System

A system that continuously updates inventory records for every purchase and sale.

Periodic Inventory System

An inventory accounting method that records inventory purchases and calculates the cost of goods sold at the end of a reporting period.

Net Realizable Value (NRV)

The estimated selling price of an inventory item minus estimated costs to complete and sell it.

Inventory Turnover Ratio

A measure of how many times inventory is sold and replaced over a period.

Gross Profit Ratio

A profitability ratio showing the relationship between gross profit and net sales.

LIFO Conformity Rule

A requirement that if a company uses LIFO for tax reporting, it must also use LIFO for financial reporting.

Lower of Cost and Net Realizable Value (LCNRV)

An accounting principle that requires inventory to be written down to its market value when that value is less than its cost.

Common Mistake in FIFO

Students often forget to count beginning inventory as the first purchase when calculating cost of goods sold.

Common Mistake in LIFO

Students are surprised that companies can report using LIFO even if they sell their goods on a FIFO basis.

Conservatism in Accounting

An accounting principle that advises companies to avoid overstating assets and income.

Adjusting Entry

An accounting entry made at the end of an accounting period to allocate income and expenses to the correct period.

Illustration 6-2

A diagram showing the flow of inventory from manufacturing to merchandising companies and to the end user.

Multiple-Step Income Statement

An income statement that separates operational revenues and expenses from non-operating revenues and expenses.

Kroger's Balance Sheet Example

An example showing the differences in reported inventory using FIFO versus LIFO.

Decision Maker’s Perspective

Insights on how measurement and communication of financial accounting information impact decision-makers.