Principles of Act. II.pdf - Oda Bultum University Principle...

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Oda Bultum UniversityPrinciple of Accounting II1CHAPTER ONEINVENTORIESIntroductionIn the last section of Principles of Accounting I, you have learned about the principles and practices ofaccounting for receivablesone of the current asset items in the balance sheet of a retail business. In thisunit you will learn and discuss the concepts inaccounting for inventories.Inventories are asset items held for sale in the ordinary course of business or goods that will be used orconsumed in the production of goods to be sold. They are mainly divided into two major:Inventories of merchandising businessesInventories of manufacturing businessesi.Inventories of merchandising businesses are merchandise purchased for resale in the normalcourse of business. These types of inventories are calledmerchandise inventories.ii.Manufacturing businesses are businesses that produce physical output. They normally havethree types of inventories. These are:Raw material inventoryWork in process inventoryFinished goods inventory1.Raw material inventoryare goods and materials on hand but not yet placedinto production. Rawmaterials include the wood to make a chair or other office furniture’s, the steel to make a car etc.2.Work in process inventory-are raw materials on which production has been started but notcompleted, plus the direct labor cost applied specifically to this material and allocated manufacturingoverhead costs.3.Finished goods inventory-are completed goods but unsold units on hand at the end of each period.In this unit only the determination of the inventory of merchandise purchased for resale commonlycalled merchandise inventory will be discussed.Importance of InventoriesMerchandise purchased and sold is the most active elements in merchandising business, i.e. in wholesaleand retail type of businesses. This is due to the following reasons:1.The sale of merchandise is the principal source of revenue for them.2.The cost of merchandise sold is the largest deductions from sales.
Oda Bultum UniversityPrinciple of Accounting II23.Inventories (ending inventories) are the largest of the current assets or those firms.Because of the above reasons inventories, have effects on the current and the following period’s financialstatements. If inventories are misstated (understated of overstated), the financial statements will bedistorted.1.1.Internal control of inventoriesCompanies must be maintain good control over inventory. Two primary objectives of control overinventory aresafeguardingtheinventoryandproperlyreportingit in the financial statements.Control over inventory should begin as soon as the inventory is received. Areceiving reportshould becompleted by the company’s receiving department in order to establish initial accountability for theinventory. To make sure the inventory received is what was ordered, the receiving report should agreewith the company’s originalpurchase orderfor the merchandise. A purchase order authorizes the purchaseof an item from a vendor. Likewise, the price at which the inventory was ordered, as shown on thepurchase order, should be compared to the price at which the vendor billed the company, as shown onthevendor’s invoice. After the receiving report, purchase order, and vendor’s invoice have been reconciled,the company should record the inventory and related account payable in the accounting records.

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Term
Winter
Professor
N/A
Tags
Depreciation, ODA BULTUM UNIVERSITY

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