chpt 6: inventory & cost of goods sold

purchase allowance

decreases the cost of inventory because the buyer got an allowance (a deduction) from the amount owed.

Gross profit (gross margin)

the difference between net sales and cost of goods. excess of sales revenue over cost of goods sold. called gross because operating expenses have not been subtracted.

purchase return

decrease in the cost of inventory because the buyer returned the goods to the seller (vendor)

net 30

term telling customer to pay the amount within 30 days.

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inventory cost

= basic purchase prise +plus freight-in, (-) purchase returns & allowances, (-) purchase discounts

FIFO cost

The first costs into inventory are the first costs assigned to cost of goods sold (first-in, first-out). the cost of ending inventory is always based on the latest costs incurred.

purchase discount

a decrease in the buyer's cost of inventory earned by paying quickly. many companies offer payment terms of 2/10 n/30...meaning buyer can take a 2% discount for a payment within 10 days,

Specific Unit Cost.

also called specific identification method. this method is too expensive for inventory items that have common characteristics, such as auto tires and laundry detergent.

average cost per unit

average cost per unit = cost of goods available / number of units available

sales revenue

based on SALE PRICE of the inventory sold (ex: 500 per unit)

cost of goods sold

based on the cost of the inventory sold (ex:300 per unit)....then sold for like 500.

balance sheet + inventory

based on the cost of the inventory still on hand.

(average cost) cost of goods sold

cost of goods sold = number of units sold x average cost per unit

what two accounts do merchandisers have than service entities done need?

cost of goods sold on the income statement; Inventory on the balance sheet

inventory equation for balance sheet

inventory (balance sheet) = number of units of inventory on hand x cost per unity of inventory

FOB terms

known as shipping terms, which indicate who owns the goods at a particular time and, therefore, who must pay for the shipping costs. FOB = free on board.

FOB shipping point

legal title to the goods passes from the seller to the purchaser when the inventory leaves the sellers place of business. the purchaser owns the inventory while in transit, and should include as units in inventory as of the year end.

(average cost) ending inventory

number of units on hand x average cost per unit

LIFO cost

opposite of FIFO. the last costs into inventory go immediately to cost of goods sold. the cost of ending inventory is always based on the oldest costs - from beginning inventory plus the early purchases of the period.

freight-out

paid by seller, under shipping terms FOB destination, is not part of cost of inventory. freight-out is delivery expense. its the seller's expense of delivering merchandise to customers

net purchases =

purchases, (-) purchase returns and allowance, (-) purchase discounts, (+) freight in

net sales =

sales revenue, (-) sales returns, (-) sales discounts

cost of inventory sold

shifts from asset to expense when the seller delivers the goods to the buyer.

average cost method

sometimes called weighted-average method. It is the average cost of inventory during the period.

4 generally accepted inventory methods

specific unit cost; average cost; first-in, first-out (FIFIO) cost; Last-in, First out (LIFO) cost

FOB destination

title of goods does not pass from the seller to the purchaser until the goods arrive at the purchaser's receiving dock. goods are NOT counted in year-end inventory of the purchasing company. the cost of these goods is included in inventory of the seller until goods reach their destination.

debit memorandum

to document approval of purchase returns, management issues debit memorandum. the accounts payable are reduced (debited) for the amount purchased.

freight 0in

transportation cost, paid by buyer, under terms of FOB shipping point. accounted for as part of the cost of inventory.

the periodic inventory system

used for inexpensive goods. these stores don't keep a running record of every good sold. they count their inventory periodically - at least once a year - to determine quantities on hand.

the perpetual inventory system

uses computer system to keep a running record of inventory on hand. still counts inventory annually. physical count establishes the correct amount of ending inventory for financial statements, and serves as a check for perpetual records.