Accounting: Chapter 6

LIFO conformity rule...

IRS rule requiring a company that uses LIFO for tax reporting to also use LIFO for financial reporting

Last-in, first-out method (LIFO)...

Inventory costing method that assumes the last units purchased (the last in) are the first ones sold (the first out).

Inventory turnover ratio...

The number of times a firm sells its average inventory balance during a reporting period. It equals cost of goods sold divided by average inventory.

LIFO adjustment...

an adjustment used to convert a company's own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements at the end of the year

Multiple-step income statement...

an income statement that reports multiple levels of income (or profitability)

Freight-out...

cost of freight on shipments to customers, which is included in the income statement either as part of cost of goods sold or as a selling expense

Net income...

difference between all revenues and all expense for the period

Net realizable value...

estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation

Weighted-average cost method...

inventory costing method that assumes both costs of goods sold and ending inventory consist of a random mixture of all the goods available for sale

First-in, first out method (FIFO)...

inventory costing method that assumes the first units purchased (first in) are the first ones sold (the first out)

Specific identification method...

inventory costing method that matches or identifies each unit of inventory with its actual cost

Gross profit ratio...

measure of the amount by which the sale of inventory exceeds its cost per dollars of sales. It equals gross profit divided by net sales

Gross profit...

the difference between net sales and cost of goods sold

Average days in inventory...

Approximate number of days the average inventory is held. It equals 365 days divided by the inventory turnover ratio.

True or false: The inventory cost flow assumption must match the physical flow of inventory units.

False

When prices increase, the ____inventory method provides the best matching of revenue and expenses.

LIFO

Lower cost and net realizable value...

Method where companies report inventory in the balance sheet at the lower of cost and net realizable value, where net realizable value equals estimated selling price of the inventory in the ordinary course of business less any costs of completion, disposal, and transportation.

Income before income taxes...

Operating income plus nonoperating revenues less nonoperating expenses

Cost of goods sold...

cost of the inventory sold during the period

Freight-in...

cost to transport inventory to the company, which is included as part of INVENTORY COST

If a company pays freight-in for its inventory, that amount will later be included in....

costs of goods sold (inventory-->costs of good sold)

Perpetual inventory system...

inventory system that maintains a continual record of inventory purchased and sold

Periodic inventory system...

inventory system that periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory at hand

Inventory...

items a company intends for sale customers in the ordinary course of business (asset)

Operating income...

profitability from normal operations that equals gross profit less operating expenses