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.
