Accounting Terms Chapter 7

what system does wighted average inventory cost use?

perpetual

Explain weighted average inventory cost

the cost of the units sold and in ending inventory is a weighted average of the purchase costs.

Two primary objectives of control over inventory are:

-Safeguarding the inventory from damage or theft. -Reporting inventory in the financial statements.

what are some examples of security measures

-Storing inventory in areas that are restricted to only authorized employees. -Locking high-priced inventory in cabinets. -Using two-way mirrors, cameras, security tags, and guards.

Explain FIFO

-first in first out -the first units purchased are assumed to be sold first and the ending inventory is made up of the most recent purchases.

Explain LIFO

-last-in, first out -the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased.

What are the 3 inventory cost flow assumptions and how do they impact the income statement and balance sheet

1. FIFO (first-in, first-out) -cost flow in the order in which the costs were incurred 2. LIFO (last-in, last-out) -cost flow is in the reverse order in which the costs were incurred 3. Weighted Average Cost -Cost flow is an average of costs

What does safeguarding inventory mean

Controls for safeguarding inventory should include security meansures to prevent damage and customer or employee theft

Purchase Order

authorizes the purchase of the inventory from an approved vendor.

subsidiary inventory ledger

The amount of inventory recorded using a perpetual inventory system for control

what is the averaging technique, moving average?

This unit cost is then used to determine the cost of each sale until another purchase is made and a new average is computed.

periodic inventory system

Using FIFO, the earliest batch purchased is considered the first batch of merchandise sold. The physical flow does not have to match the accounting method chosen

physical inventory

count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate.

receiving report

establishes an initial record of the receipt of the inventory.