Chapter Two-Accounting for Inventory.docx - Chapter TWO:...

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Chapter TWO: ACCOUNTING FOR INVENTORYChapter TWO: ACCOUNTING FOR INVENTORYINTRODUCTIONINTRODUCTIONIn the last section of Principles of Accounting, you have learned about the principles andIn the last section of Principles of Accounting, you have learned about the principles andpractices of accounting for receivables – one of the current asset items in the balance sheet of apractices of accounting for receivables – one of the current asset items in the balance sheet of aretail business. In this unit you will learn and discuss the concepts in accounting for inventories.retail business. In this unit you will learn and discuss the concepts in accounting for inventories.Inventories are asset items held for sale in the ordinary course of business or goods that will beInventories are asset items held for sale in the ordinary course of business or goods that will beused or consumed in the production of goods to be sold. They are mainly divided into two major:used or consumed in the production of goods to be sold. They are mainly divided into two major:Inventories of merchandising businessesInventories of merchandising businessesInventories of manufacturing businessesInventories of manufacturing businessesi.i.Inventories of merchandising businesses are merchandise purchased for resale in theInventories of merchandising businesses are merchandise purchased for resale in thenormal course of business. These types of inventories are called merchandisenormal course of business. These types of inventories are called merchandiseinventories.inventories.ii.ii.Inventories of manufacturing businesses manufacturing businesses are businesses thatInventories of manufacturing businesses manufacturing businesses are businesses thatproduce physical output. They normally have three types of inventories. These are:produce physical output. They normally have three types of inventories. These are:Raw material inventoryRaw material inventoryWork in process inventoryWork in process inventoryFinished goods inventoryFinished goods inventory1.1.Raw material inventoryRaw material inventory-is the cost assigned to goods and materials on hand but not yet-is the cost assigned to goods and materials on hand but not yetplacedinto production. Raw materials include the wood to make a chair or other officeplacedinto production. Raw materials include the wood to make a chair or other officefurniture’s, the steel to make a car etc.furniture’s, the steel to make a car etc.2.2.Work in process inventoryWork in process inventory-is the cost of raw material on which production has been startedis the cost of raw material on which production has been startedbut not completed, plus the direct labor cost applied specifically to this material and allocatedbut not completed, plus the direct labor cost applied specifically to this material and allocatedmanufacturing overhead costs.

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Term
Fall
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Physical inventory

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