8. Intermediate Accounting Chapter 8

double-extension method

A method for computing a specific internal price index

net method

A method in which a company considers purchase discounts lost as a financial expense

net of the cash discounts

A method in which a company records the failure to take a purchase discount within the discount period in a Purchase Discounts Lost account.

specific-goods pooled LIFO approach

A method used to alleviate LIFO liquidation problems and to simplify LIFO accounting, by grouping goods into pools of similar items.

Periodic inventory system

A periodic inventory system adjusts inventory and records cost of goods sold only at the end of each reporting period.

Perpetual inventory system

A perpetual inventory system continuously records both changes in inventory quantity and inventory cost.

Purchase return

A purchase return represents a reduction of net purchases.

modified perpetual inventory system

A system that provides detailed inventory records of increases and decreases in quantities only, not dollar amounts

dollar-value LIFO

A variation of the LIFO it determines inventory in terms of total dollar value, not the physical quantity

Purchase Discounts

An account in a periodic inventory system that indicates the company is recording its purchases and accounts payable at the gross amount

perpetual inventory system

An inventory system in which a company continuously tracks changes in the Inventory account.

inventories

Asset items that a company holds for sale or goods that it will use or consume in the production of goods to be sold.

period costs

Costs that attach to a specific accounting period

LIFO liquidation

Erosion of the LIFO inventory under a specific-goods (unit LIFO) approach.

Consignment

Goods held on consignment are included in the inventory of the consignor until sold by the consignee.

LIFO conformity rule

If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors

LIFO conformity rule

If a company uses LIFO to measure its taxable income, IRS regulations require that LIFO also be used to measure income reported to investors and creditors (the LIFO conformity rule).

Raw materials

Inventory for a manufacturing company consists of raw materials, work in process, and finished goods.

consigned goods

Inventory held by one party who acts as the agent for the owner of the goods in selling the goods.

f.o.b. destination

Inventory shipped f.o.b. destination is included in the purchaser's inventory only after it reaches the purchaser's destination.

f.o.b. (free on board) shipping point

Inventory shipped f.o.b. shipping point is included in the purchaser's inventory as soon as the merchandise is shipped.

periodic inventory system

Inventory system in which a company uses a Purchases account to record purchases of inventory during the period.

first-in, first-out (FIFO) method

Inventory-costing method that assumes that a company uses goods in the order in which it purchases them

last-in, first-out (LIFO) method

Inventory-costing method that assumes that a company uses the latest goods purchased before it uses the earlier goods purchased.

average cost method

Inventory-costing method that prices items in the inventory on the basis of the average cost of all similar goods available

weighted-average method

Inventory-costing method, used in the periodic inventory method, that prices items in the inventory on the basis of the average cost of all similar goods available during the period.

specific identification

Inventory-costing methods in which companies identify and cost each item sold and each item in inventory.

Purchase discounts

Purchase discounts represent reductions in the amount to be paid if remittance is made within a designated period of time.

cost flow assumptions

Several assumptions about the flow of inventory average cost, FIFO, and LIFO

Average cost method

The average cost method assumes that items sold and items in ending inventory come from a mixture of all the goods available for sale.

LIFO effect

The change from one period to the next in the balance of the account

raw materials inventory

The cost assigned to goods and materials on hand but not yet placed into production.

Freight-in or Transportation-in

The cost of freight-in paid by the purchaser generally is part of the cost of inventory.

work in process inventory

The cost of partially processed units in a continuous production process, consisting of the raw material for these unfinished units, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs.

Work-in-process

The cost of work in process and finished goods includes the cost of raw materials, direct labor, and an allocated portion of manufacturing overhead.

finished goods inventory

The costs identified with the completed but unsold units on hand

LIFO reserve

The difference between the inventory amount reported using LIFO for external and internal reporting purposes

Gross method

The gross method views discounts not taken as part of inventory cost.

Gross profit ratio

The gross profit ratio indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and to provide a profit.

Last-in, first-out (LIFO) method

The last-in, first-out (LIFO) method assumes that items sold are those that were most recently acquired.

Net method

The net method considers discounts not taken as interest expense.

First-in, first-out (FIFO) method

The first-in, first-out (FIFO) method assumes that items sold are those that were acquired first.

moving-average method

a company computes a new average unit cost each time it makes a purchase.

Periodic inventory system

adjusts inventory and records cost of goods sold only at the end of each reporting period.

Average cost method

assumes that items sold and items in ending inventory come from a mixture of all the goods available for sale.

Net method

considers discounts not taken as interest expense.

Perpetual inventory system

continuously records both changes in inventory quantity and inventory cost.

product costs (inventory)

direct materials, direct labor, and manufacturing overhead costs

f.o.b. (free on board) shipping point

included in the purchaser's inventory as soon as the merchandise is shipped.

f.o.b. destination

included in the purchaser's inventory only after it reaches the purchaser's destination.

Gross profit ratio

indicates the percentage of each sales dollar available to cover expenses other than cost of goods sold and to provide a profit.

First-in, first-out (FIFO) method

method assumes that items sold are those that were acquired first.

Last-in, first-out (LIFO) method

method assumes that items sold are those that were most recently acquired.

gross method

purchase discounts are reflected as a deduction from purchases on the income statement

Purchase discounts

represent reductions in the amount to be paid if remittance is made within a designated period of time.

Purchase return

represents a reduction of net purchases.

f.o.b. shipping point

the buyer pays the freight costs title passes to buyer when carrier takes possession

merchandise inventory

the cost assigned to unsold units left on hand, but ready for sale

f.o.b. destination

the seller pays the freight costs; title passes to the buyer when the buyer receives the goods

Gross method

views discounts not taken as part of inventory cost.