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Int. Acct. I
Ch. 7: Valuation of Inventories: A Cost-Basis Approach
| Term | Definition |
|---|---|
| inventories | assets that a company holds for sale |
| merchandise inventory | usually purchase their merchandise in a form ready for sale; they report the cost assigned to unsold units left on hand |
| raw materials inventory | This account represents the cost of goods and materials on hand but not yet placed into production |
| work in process inventory | this account represents the cost 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 |
| finished goods inventory | this account includes the costs identified with the completed but unsold units on hand at the end of the fiscal period. |
| perpetual inventory system | continuously tracks changes in the Inventory account. That is, a company records all purchases and sales of goods directly in the Inventory account as they occur |
| periodic inventory system | a company determines the quantity of inventory on hand only periodically, as the name implies |
| goods in transit | shipping terms determine when title passes between the buyer and seller; these terms also determine when delivery has occurred for revenue recognition purposes |
| F.O.B shipping point | title transfers from the seller to the buyer at the shipping point |
| F.O.B. destination | title transfers from the seller to the buyer at the destination point |
| consigned goods | goods out on consignment remain the property of the consignor. |
| F.O.B. | free on board |
| product costs | included in the inventory account on the balance sheet until products are sold; costs directly connected with bringing the inventory to the buyer’s place of business and converting the goods to a salable condition |
| period costs | expense as incurred on the income statement; indirectly related to the acquisition of goods and are generally more difficult to assign to specific inventory items |
| purchase discounts | cash discounts from the purchaser's perspective; can be recorded using either the gross or net method |
| gross method (purchase) | ignore the purchase (cash) discount when initially recording the purchase |
| net method | assume the purchase (cash) discount will be taken when initially recording the purchase |
| specific ID | when an item is sold, its exact cost is matched with its related revenue |
| average cost | based on the average of items in beginning inventory and new goods purchased. |
| FIFO (First-In, First-Out) | assumes goods are used/sold in the order purchased |
| LIFO (Last-In, First-Out) | Assumes that the last goods purchased are used/sold first |
| cost flow assumption | relate to the flow of costs and not to the physical flow of inventory items in and out of the company |
| LIFO conformity rule | a requirement If a company uses LIFO for the tax benefit of paying less income tax, then it must also use LIFO for financial reporting purposes. |
| LIFO Reserve | the difference between LIFO and the method used for internal reporting |
| Allowance to Reduce Inventory to LIFO account | the allowance account or balance that is carried forward each year and adjusted as necessary; contra-asset |
| Inventory Adjustment | LIFO Inventory + LIFO Reserve = FIFO Inventory |
| FIFO COGS | LIFO COGS - change in LIFO Reserve |
| Specific Goods LIFO (Traditional/ Unit LIFO) | Each item in the inventory is individually costed on a LIFO basis |
| LIFO liquidations | a frequent occurrence when specific goods LIFO is used. When the inventory balance is reduced (liquidated) the cost of the old inventory layers is included in cost of goods sold, resulting in higher net income and “paper profits.” |
| layers | increase from period to period |
| base (layer) | first layer |
| pool | groups items of a similar nature |
| Specific Goods Pooled LIFO | inventory items are combined in pools of similar items. This approach may help prevent LIFO liquidations because decreases in one quantity may be offset by increases in another quantity. |
| erosion | losing much of the LIFO costing benefit; occurs when a specific good or material in the pool is replaced with another good or material |
| dollar-value LIFO | inventory pool is measured by increases and decreases to the total dollar value and not the physical quantity of goods. This method uses the current price index (CPI) to help protect the balance sheet from erosion of the inventory value |
| CPI | current price index; helps protect the balance sheet from erosion of the inventory value |
| Consumer Price Index for Urban Consumers (CPI-U) | most popular general external price-level index |
| double-extension method | pricing ending inventory at the most current cost; the value of the units in inventory is extended at both base-year prices and current-year prices |
Created by:
ryanriggs18
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