Financial Accounting: Chapter 6 - Cost of Goods Sold and Inventory

These flashcards cover key concepts related to the cost of goods sold and inventory management in financial accounting.

Cost of Goods Sold (COGS)

An expense that represents the outflow of resources caused by the sale of inventory.

Gross Margin

A key performance measure computed as sales revenue less cost of goods sold.

Merchandiser

Companies, either retailers or wholesalers, that purchase inventory in a finished condition for resale.

Perpetual Inventory System

An inventory system where balances for inventory and cost of goods sold are continually updated.

Periodic Inventory System

An inventory system that records the cost of purchases and takes a physical inventory count at the end of the period.

FIFO (First-In, First-Out)

An inventory costing method where the earliest purchases are assumed to be the first sold.

LIFO (Last-In, First-Out)

An inventory costing method that assumes the most recent purchases are the first to be sold.

Average Cost Method

An inventory costing method that allocates the cost of goods available for sale based on a weighted average cost per unit.

Net Realizable Value

The estimated selling price of inventory minus the costs of disposal.

Inventory Turnover Ratio

A ratio that describes how quickly inventory is purchased and sold.

Purchase Discounts

Price reductions offered to customers to encourage prompt payment.

Purchase Returns

The cost of merchandise returned to suppliers.

Consignment

An arrangement where goods owned by one party are held and sold by another.

Transportation Costs

Expenses related to the shipping of goods.

Lower of Cost or Net Realizable Value Rule (LCNRV)

The valuation of inventory at the lower of its historical cost or its net realizable value.

Gross Profit Margin

A ratio expressing the portion of sales revenue that exceeds the cost of goods sold.

Inventory Classification

Merchants classify inventory as merchandise; manufacturers classify it as raw materials, work-in-process, and finished goods.

Channel Stuffing

Encouraging clients to take more goods than needed to generate temporary revenue.

Historical Cost Principle

The accounting principle stating that assets should be recorded at their historical cost.

Inventory Error Effects

Errors in inventory measurement that affect both the balance sheet and income statement.

Flow of Inventory Costs

The process by which costs in inventory are allocated between ending inventory and cost of goods sold during accounting periods.