You can find essential accounting terms and definitions for inventory cost flow on this page.

  • Average-cost methodInventory costing method that uses the weighted average unit cost to allocate to ending inventory and cost of goods sold the cost of goods available for sale.
  • Last-in, first-out (LIFO) methodInventory 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 stated at the lower of either its cost or its market value as determined by current replacement cost.
  • 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.
  • Gross profit method – A method for estimating the cost of the ending inventory by applying a gross profit rate to net sales and subtracting estimated cost of goods sold 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.
  • 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 although ownership of the goods is retained by another party.
  • 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.
  • 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.
  • Inventory turnover – A ratio that measures the number of times on average the inventory sold during the period; computed by dividing cost of goods sold by the 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.