College Accounting - Chapter 13 Accounting for Merchandise Inventory

Natural Business Year

A fiscal year that starts and ends at the time the stock of goods is normally at it lower level.

Inventory Sheet

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

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 dividing the total cost of units available for sale by the total number of units available for sale.

Specific Identification Method

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

First in, First out (FIFO) Method

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

Last in, First out (LIFO) 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 inventory.

Gross Profit Method

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

Physical Inventory

A physical count of the goods on hand.

Retail Method

A variation of the gross profit method that is used by many retail businesses, such as department and clothing stores, to estimate the cost of goods sold and ending inventory.

Cosignment

Goods that are held by one business for sale but that are owned by another business.

In Transit

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

Cost

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

Market

In applying the lower of cost or market method, market means the cost to replace the inventory. It is the prevailing price in the market in which goods are purchased - not the prevailing price in the market in which they are normally sold.

Conservatism

The accounting practice of conservatism states that we should never anticipate gains, 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 by 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 statement over time.

Loss on Write 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 statement as an expense.

Periodic Inventory System

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

Perpetual Inventory System

Under this system, the merchandise inventory and cost of goods sold accounts are updated when merchandise is bought and sold.