Chapter 13

Natural Business Year

A fiscal year that starts and ends at the time the stock of goods is normally at its lowest level

Inventory Sheet

A form used for recording the description of each item. It has columns for recording the description of each item , the quantity on hand, the cost per unit and the extension

Weighted average method

A method of allocating merchandise cost based on the average cost of identical units . The average cost of identical units is determined by divding the total cost of units available for sale by the total number of units avaible for sale

Specfic Identification Method

A method of allocating merchandise cost in which unit of inventory is specifically identified

First in first out

A method of allocating merchandise cost which assumes that the first goods purchsed were the first goods sold and therefore that the latest goods purchased remain in inventory

Last in First out Method

A method of allocating merchandise cost which assumes that the sales in the period were made from the most recently purchased goods. Therefore the earliest goods purchased remain in the inventory

Gross Profit Method

A method of estimating inventory in which a businesses normal gross profit percentage is used to estimate the cost of goods sold and ending inventory

Physical Inventory

A physical count of goods on hand

Retail Method

A variation of the gross profit method that is used by many retial bussinesses (department and clothing stores)

Lower of cost or market value

An inventory valuation method under which inventory is valued at the lower of the cost or market value (replacement cost)

In Transit

Goods that are in the process of being shipped between the seller and the buyer

Consignment

Good that are held by one business for sale by that are owned by another business

Market

In applying the lower of the cost or market method , market means the cost to replace the inventory.It is prevailing price in the market in which they are normally sold

Cost

In applying the lower or cost or market method , cost means the dollar amount calculated using one of the four inventory costing methods

Conservatism

The accounting practice of conservatism states that we should never anticpategains but always anticipate and account for losses. As applied to inventory , conservatism means that if the value of inventory declines while it is being held the loss should be recognized in the period of the decline

Consignee

The company holding the merchandise of another business to be sold

Consignor

The owner of the merchandise that is held bu another business

Consistency

The principle that states that a business should use the same accounting methods from period to period. This improves the comparability of the financial statments over time

Loss on Wrtie Down of Inventory

This account is debited when the market value (replacement cost)of the inventory is below cost when applying the lower of cost or market method of inventory valuation . It is reported on the income statment as an expense

Periodic Inventory System

Under this system the merchandise inventory and cost of goods sold are determined at the end of the accounting period when a physical inventory is taken