Chapter 6 Inventory and Cost of Goods Sold

Net income

all revenues - all expenses

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.

Freight-in

Cost to transport inventory to the company, which is included as part of inventory cost.

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.

Inventory

Items a company intends for sale to customers.

Income Before Taxes

(operating income + non-operating revenues) - non-operating expenses

Inventory turnover ratio

Cost of goods sold divided by average inventory; the number of times the firm sells its average inventory balance during a reporting period.

Cost of goods sold

Cost of the inventory that was sold during the period.

LIFO conformity rule

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

Replacement cost

The cost to replace an inventory item in its identical form.

Gross profit

The difference between net sales and cost of goods sold.

Multiple Step Income Statement

Gross Profit Operating Income Income Before Taxes Net income

Operating Expense

Gross Profit -Operating Expense

Weighted-average cost method

Inventory costing method that assumes both cost 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 (the first in) are the first ones sold (the first out).

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).

Specific identification method

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

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 on hand.

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.

Multiple-step income statement

An income statement that reports multiple levels of income (or profitability).

Average days in inventory

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

Net income

Difference between all revenues and all expenses for the period.

Gross profit ratio

Measure of the amount by which the sale price of inventory exceeds its cost per dollar of sales. It equals gross profit divided by net sales.

Lower-of-cost-or-market (LCM) method

Method where companies report inventory in the balance sheet at the lower of cost or market value, where market value equals replacement cost.

Gross Profit

Net Sales-Cost of Goods Sold

Income before income taxes

Operating income plus nonoperating revenues less nonoperating expenses.

Operating income

Profitability from normal operations that equals gross profit less operating expenses.