Accounting Chapter 5

What’s a Consignee?

sells goods for the owner.

What’s a Consignor?

continues to own the consigned goods and reports them in its inventory.

Goods on Consignment

goods shipped by the owner, called the consignor, to another party, the consignee.

Physical Count of Inventory

at least once a year; this count is used to adjust the Inventory account balance to the actual inventory on hand.

First-In, First-Out (FIFO)

an inventory management method where the oldest items in inventory are used or sold before the newest ones. In simpler terms, it's like following a queue; the first items to enter are the first to leave.

Last-In, First-Out (LIFO)

an inventory valuation method where the newest items added to inventory are assumed to be the first ones sold

Weighted average

equals cost of goods available for sale divided by the units available. Average is computed at the time of each sale.

Specific identification

assigns a unique cost to each individual inventory item, linking it to the specific item sold

Rising Costs

when purchase costs regularly rise

Falling Costs

When costs regularly decline, the reverse occurs for FIFO and LIFO.

A decline in market value means…

a loss of value in inventory

If ending inventory is understated (For assets and equity)

assets and equity are understated.

If ending inventory is overstated(For assets and equity)

assets and equity are overstated.

Inventory turnover, also called merchandise inventory turnover,

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

Day’s sales in inventory

measures the adequacy of inventory to meet sales demand. It reveals how much inventory is available in terms of the number of days’ sales.

dividing ending inventory by cost of goods sold, and then multiplying the result by 365 =

Day’s sales in inventory