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Prin. Acct. Ch. 6

Terms and Definitions

QuestionAnswer
Average-Cost Method Inventory costing method that uses the wighted average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale.
Conservatism Concept that dictates that when in doubt, choose the method that will be least likely to overstate assets and net income.
Consigned Goods Goods held for sale by one party (the consignee) although the ownership of the goods is retained by another parter (the consignor)
Consistency Principle Dictates that a company use the same accounting principles and methods from year to year.
Current Replacement Cost The current cost to replace an inventory item.
Days in Inventory Measure of the average number of days inventory is held; calculated as 365 divided by inventory turnover ratio.
Finished Goods Inventory Manufactured items that are completed and ready for sale.
First-In, First-Out (FIFO) Method Inventory costing method that assumes that the costs of the earliest goods purchased are the first to be recognized as cost of goods sold.
FOB (Free on Board) Destination Freight terms indicating that ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
FOB Shipping Point Freight terms indicating that ownership of the goods remains with the seller until the goods reach the buyer.
Inventory Turnover Ratio A ratio that measures the number of times on average the inventory sold during th period; computed by dividing the cost of gods sold by average inventory during the period.
Just-In-Time (JIT) Inventory Method Inventory system in which companies manufacture or purchase goods just in time for use.
Last-In, First Out, (LIFO) Method Inventory costing method that assumes the costs of the latest units purchased are the first to be allocated to cost of goods sold.
Lower-of-Cost-or-Market (LCM)Basis A basis whereby inventory is states at the lower of either its cost or its market value as determined by current replacement cost.
Raw Materials Basic goods that will be used in production but have not yet been placed into production.
Specific Identification Method An actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory.
Weighted Average Unit Cost Average cost that is weighted by the number of units purchased at each unit cost.
Work in Progress That portion of manufactured inventory that has been placed into the production process but is not yet complete.
Gross Profit Method A method for estimating the cost of the ending inventory by applying a gross profit rate to net sales and subtracting the result from cost of goods available for sale.
Retail Inventory Method A method for estimating the cost of the ending inventory by applying a cost-to-retail ratio to the ending inventory at retail.