ch. 6 - Financial Accounting - Chapter 6 1 Chapter 6 -...

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Unformatted text preview: Financial Accounting - Chapter 6 1 Chapter 6 - Study Objectives After studying this chapter, you should be able to: 1. Describe the steps in determining inventory quantities. 1. Explain the basis of accounting for inventories and apply the inventory cost flow methods under a periodic inventory system. 1. Explain the financial statement and tax effects of each of the inventory cost flow assumptions. 1. Explain the lower of cost or market basis of accounting for inventories. 1. Compute and interpret the inventory turnover ratio. 1. Describe the LIFO reserve and explain its importance for comparing results of different companies. Financial Accounting - Chapter 6 2 Determining Inventory Quantities In a periodic system, no attempt is made on date of sale to record the cost of merchandise sold. A physical count of inventory is taken at end of period to determine: Cost of merchandise on hand; Cost of goods sold. Financial Accounting - Chapter 6 3 Questions Concerning Ownership Do all the goods included in the count belong to the company? Does the company own any goods not included in the count? You must record the purchase when you legally own them and it often depends on the following shipping terms: FOB Shipping Point - title passes at shipping point; buyer owns during transit. FOB Destination Point - title passes at final destination; seller owns during transit. In addition, some companies hold goods of other parties and sell the goods for a fee but without taking ownership. These are called consigned goods. Financial Accounting - Chapter 6 4 The Flow of Inventory Costs For the year-end F/S, you must determine how much of your total inventory cost should be assigned to Cost of Goods Sold (Expense) and how much should remain in Inventory (Asset). Note the following: CGS + Ending Inventory = Total Cost of Inventory Available for Sale Potential Problem: Determining the cost per unit of the inventory you sold (or have left) is a major problem if you bought identical inventory units at different cost prices. For example, if you buy 3 lamps for the following costs: Lamp #1 - $3 cost Lamp #2 - $4 cost Lamp #3 - $5 cost $12 Total cost of inventory available for sale If you sell 1 lamp for $10, what is the amount you assign to Cost of Goods Sold? Also, what might be the potential methods of computing Cost of Ending Inventory and the Cost of Goods Sold?...
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ch. 6 - Financial Accounting - Chapter 6 1 Chapter 6 -...

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