Ch 5: Inventories and Cost of Sales Key Terms

Vocabulary flashcards covering key inventory valuation methods, metrics, and accounting concepts.

Average cost

Method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale, which is then multiplied by the units sold to yield the cost of that sale; also called weighted average.

Consignee

Receiver of goods owned by another who holds them for purposes of selling them for the owner.

Consignor

Owner of goods held by another party who will sell them for the owner.

Days’ sales in inventory

Estimate of number of days needed to convert inventory into receivables or cash; equals ending inventory divided by cost of goods sold and then multiplied by $365$; also called days’stock on hand.

First-in, first-out (FIFO)

Method to assign cost to inventory that assumes items are sold in the order acquired; earliest items purchased are the first sold.

Gross profit method

Procedure to estimate inventory by using the past gross profit rate to estimate cost of goods sold, which is then subtracted from the cost of goods available for sale.

Interim financial statements

Financial statements covering periods of less than one year; usually based on one-, three-, or six-month periods.

Inventory turnover

Number of times a company’s average inventory is sold during a period; computed by dividing cost of goods sold by average inventory; also called merchandise turnover.

Last-in, first-out (LIFO)

Method for assigning cost to inventory that assumes costs for the most recent items purchased are sold first and charged to cost of goods sold.

Lower of cost or market (LCM)

Required method to report inventory at market replacement cost when that market cost is lower than recorded cost; applies to firms using LIFO.

Lower of cost or net realizable value (LCNRV)

Required method to report inventory at net realizable value (NRV) when that value is lower than recorded cost; applies to firms using FIFO, weighted average, or specific identification.

Retail inventory method

Method for estimating ending inventory based on the ratio of the amount of goods for sale at cost to the amount of goods for sale at retail.

Specific identification (SI)

Method for assigning cost to inventory when the purchase cost of each item in inventory is identified and used to compute cost of goods sold and/or cost of inventory.

Weighted average (WA)

Method for assigning inventory cost to sales; the cost of available-for-sale units is divided by the number of units available to determine per unit cost prior to each sale, which is then multiplied by the units sold to yield the cost of that sale; also called average cost.