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AA015 Chapter 8.pdf - ACCOUNTING 1 (AA015) ACCOUNTING FOR...

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ACCOUNTING 1 (AA015)ACCOUNTING FOR INVENTORIES1CHAPTER 8ACCOUNTING FORINVENTORIESLEARNING OUTCOMES8.1Definition of Inventories8.2Inventory Systems8.3Inventory Costing Methods8.4Effects of Inventory Valuation on Profit
ACCOUNTING 1 (AA015)ACCOUNTING FOR INVENTORIES28.1DEFINITION OF INVENTORIESThe merchandise that a business sells to customers.(Horngren)Both U.S. GAAP and IFRSs define inventories as assets that area) held for sale in the ordinary course of business,b) used in the process of production for sale, orc) materials or supplies to be consumed in the production of inventory or in therendering of services.Two common characteristics:1. owned by the company2. in a form ready for sale to customers in the ordinary course of businessTypes of Inventories:a) Raw materialsBasic goods that will be used in production but have not yet been placed intoproductionb) Work in processPortion of manufactured inventory that has been placed into the productionprocess but is not yet complete.c) Finished goodsManufactured items that are completed and ready for sale.8.2INVENTORY SYSTEMS8.2.1Periodic Inventory SystemCompanies do not keep detailed inventory records of the goods on handthroughout the period. Instead, they determine the cost of goods sold only atthe end of the accounting periodthat is, periodically. At that point, thecompany takes a physical inventory count to determine the cost of goods onhand. To determine the cost of goods sold under a periodic inventory system,the following steps are necessary:i.Determine the cost of goods on hand at the beginning of the accountingperiod.ii.Add to it the cost of goods purchased.iii. Subtract the cost of goods on hand at the end of the accounting period.8.2.2Perpetual Inventory SystemCompanies keep detailed records of the cost of each inventory purchase andsale. These records continuouslyperpetuallyshow the inventory thatshould be on hand for every item. Under a perpetual inventory system, acompany determines the cost of goods sold each time a sale occurs.
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