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conservatism
concept that if there is uncertainty in a potential financial estimate, a company should err on the side of caution and report the most conservative amount
consignment
arrangement whereby goods are available to sell by one party, but owned by another party, without transfer of ownership
consistency principle
accounting methods applied in a like manner, across multiple periods, allow for contrast and comparison between periods
first-in, first-out method (FIFO)
inventory cost allocation method that assumes the earliest acquired inventory items are the first to be sold
FOB destination point
transportation terms whereby the seller transfers ownership and financial responsibility at the time of delivery
FOB shipping point
transportation terms whereby the seller transfers ownership and financial responsibility at the time of shipment
goods available for sale
total of all inventory (beginning inventory plus purchased inventory); will either be sold this period or held in period-end inventory
gross profit
net profit from sale of goods; sales revenue minus cost of goods sold
gross profit method
inventory estimation tool that uses a company’s usual gross profit percentage, related to total sales revenue, to estimate the cost of the ending inventory
inventory turnover ratio
computed by dividing cost of goods sold by average inventory; measures number of times inventory rotated through the sales cycle for the period
last-in, first-out method (LIFO)
inventory cost allocation method that assumes the latest acquired inventory items are the first to sell
lower-of-cost-or-market (LCM)
conservatism-based concept that mandates inventory be reported at the lower of the value of inventory reflected in the general ledger or replacement value
merchandise inventory
goods held for sale at a given point in the period
number of days’ sales in inventory ratio
computed by dividing average merchandise inventory by average daily cost of goods sold; measures number of days it would take to clear remaining inventory
periodic inventory system
system that is updated at the end of the period, to match the physical count of goods on hand
perpetual inventory system
system that automatically updates and records the inventory account every time a sale or purchase of inventory occurs
purchases
new acquisitions of merchandise inventory during the period
retail inventory method
inventory estimation tool that uses a company’s usual gross profit percentage, related to total sales revenue, to estimate the retail value of the ending inventory, which can then be reduced to an estimated cost figure
specific identification method
inventory cost allocation method that traces actual cost of each specific item, whether sold or held in inventory; usually used for customized or differentiated products
weighted-average method
inventory cost allocation method that calculates the average value inventory items by weighting each purchase lot’s goods available for sale, before dividing by the total number of units of that item
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