Chapter 6 Notes

These flashcards cover key vocabulary and concepts related to merchandise inventory accounting principles, methods, and financial impacts.

Consistency Principle

States that a business should use the same accounting methods and procedures from period to period.

Disclosure Principle

Financial statements should report enough information for outsiders to make knowledgeable decisions about the company.

Materiality Concept

A company must perform strictly proper accounting only for items that are significant to the business’s financial situation.

Conservatism

Means a business should report the least favorable figures in the financial statements when two or more options are presented.

Perpetual Inventory System

A method where inventory levels are continuously updated in real-time as purchases and sales occur.

Cost of Goods Sold (COGS)

The total cost of purchasing or producing goods that a company has sold during a specific time period.

FIFO (First-In, First-Out)

An inventory costing method that assumes the oldest inventory items are sold first.

LIFO (Last-In, First-Out)

An inventory costing method that assumes the newest inventory items are sold first.

Weighted-Average Method

An inventory costing method that averages the cost of all inventory available for sale during the period.

Lower-of-Cost-or-Market Rule (LCM)

A rule that requires inventory to be reported at the lower of its historical cost or its market value.

Inventory Turnover Ratio

A ratio that measures how quickly a company sells its inventory.

Days’ Sales in Inventory

A measure that calculates the average number of days that inventory is held before it is sold.

Inventory Error

An error in the inventory balance that can lead to inaccuracies in related financial statements.

GAAP

Generally Accepted Accounting Principles, the standard framework of guidelines for financial accounting.

Accounting Conservatism Principle

A principle that advises recognizing expenses and liabilities as soon as possible, but revenues only when they are assured.

Revenue Recognition Principle

States that revenue should be recognized when it is earned, regardless of when cash is received.

Matching Principle

Requires that expenses be matched with the revenues they help to generate in the same accounting period.

Going Concern Principle

Assumes that a business will continue to operate indefinitely into the future, rather than being liquidated.

Business Entity Principle

States that the financial affairs of a business must be kept separate from the owner's personal financial affairs.

Monetary Unit Assumption

Requires that financial transactions be recorded only in terms of money, providing a common denominator for financial statement items.

Time Period Assumption

States that a business's economic activities can be divided into specific time periods, such as months, quarters, or years, for financial reporting purposes.

Periodic Inventory System

A method where inventory levels are determined by physical counts at specific intervals (e.g., end of an accounting period), and COGS is calculated at that time.