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.
...
.
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.
