CH 6: Inventory and Cost of Goods Sold

perpetual inventory system

A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.

Average Days in inventory

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

Costs of Goods sold

Cost of the inventory that was sold during the period.

Multi-Step Income Statement

Income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income.

First in Last out (FILO)

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).

Inventory

Items a company intends for sale to customers.

Gross profit ratio

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

Income before taxes

Operating income plus nonoperating revenues less nonoperating expenses.

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.

Net Realizable Value

Total Accounts receivable - Allowance for uncollectible accounts

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

Operating Income

gross profit - operating expenses

specific identification method

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

Gross Profit

net sales - cost of goods sold