Merchandising Operations and Inventory Costing: every key term you need (+ practice quiz)
25 flashcard terms for Financial Accounting Topic 4, written to match the course framework. Study them here, then drill them as interactive flashcards, or test yourself with the 15-question quiz — free, no account needed.
A business that buys finished goods and resells them without changing their form. Its central cost is the purchase price of goods sold, and its main asset is often inventory held for resale.
Cost of goods sold
The cost of the units actually transferred to customers during the period. It is the largest expense for most retailers and is subtracted from net sales to arrive at gross profit.
Gross profit
Net sales less cost of goods sold, measuring the markup earned before operating costs. Falling gross profit usually signals price pressure, a worse product mix or rising supplier costs.
Multi-step income statement
A format that reports gross profit, then operating income, then other items before tax. The subtotals let readers separate merchandising margin from administrative and financing effects.
Perpetual inventory system
Inventory and cost of goods sold are updated with every purchase and every sale, so the ledger shows the balance continuously. A physical count then serves to verify rather than to compute.
Periodic inventory system
Purchases accumulate in a temporary account and cost of goods sold is computed only at period end from a physical count. Shrinkage is buried inside the computed cost figure rather than isolated.
Cost of goods available for sale
Beginning inventory plus net purchases including freight-in. This pool is split between ending inventory on the balance sheet and cost of goods sold on the income statement.
First-in first-out
A cost flow assumption that the oldest units are sold first, leaving the newest costs in ending inventory. When prices rise it reports the highest income and the most current balance sheet value.
Last-in first-out
A cost flow assumption that the newest units are sold first, so old costs remain in inventory. When prices rise it reports lower income and lower taxes but a stale balance sheet amount.
Weighted-average cost
Total cost of goods available divided by total units available gives one average cost applied to both units sold and units remaining, producing results between the two extreme flow assumptions.
Specific identification
Each unit is tracked with its own actual cost. Appropriate for unique high-value items such as vehicles or art, but it lets management pick which cost to release by choosing which unit to ship.
Cost flow assumption
An accounting choice about which costs move to expense first. It need not match the physical movement of goods, which is why a grocer rotating stock may still use a different assumption.
LIFO reserve
The disclosed difference between inventory measured on the last-in first-out basis and what it would be on a current-cost basis. Analysts add it back to compare firms using different methods.
LIFO liquidation
When a firm sells more units than it buys, old low costs are released into expense, inflating gross profit with a gain that has nothing to do with operating performance.
Lower of cost and net realizable value
Inventory is written down when its selling value less completion and disposal costs falls below recorded cost. The write-down is an expense in the period the value decline is identified.
Net realizable value
Estimated selling price in the ordinary course of business less the reasonably predictable costs of completion and sale. It is the ceiling on what an inventory item may be carried at.
FOB shipping point
Title and risk pass to the buyer when the carrier takes the goods, so goods in transit belong to the buyer and the buyer bears the freight cost as part of inventory cost.
FOB destination
Title passes only on arrival, so goods in transit at period end remain the seller's inventory and the seller absorbs the shipping cost as a delivery expense.
Purchase discount
A price reduction offered for prompt payment, quoted in terms such as two ten, net thirty. Taking it usually beats borrowing, because the implied annual rate of forgoing it is very high.
Purchase returns and allowances
Reductions of the recorded purchase for goods sent back or for price concessions on defective merchandise. They lower net purchases and therefore lower cost of goods available for sale.
Freight-in
Transportation cost of bringing purchased goods to the buyer. It is a cost of getting inventory ready for sale and is capitalized into inventory rather than expensed immediately.
Freight-out
Delivery cost of shipping goods to customers. It is a selling expense of the current period and is never added to the cost of the inventory that remains unsold.
Sales returns and allowances
A contra-revenue account holding refunds and price concessions granted to customers. Reporting it separately from gross sales reveals how much of the sales figure is being given back.
Inventory turnover
Cost of goods sold divided by average inventory, showing how many times stock cycles in a year. High turnover signals efficiency, though pushed too far it produces stockouts and lost sales.
Consigned goods
Merchandise held by one party but owned by another. The consignor keeps it in inventory until final sale, so a shop's count must exclude goods it merely displays for someone else.