Chapter 7 Accounting - 7 Inventories 7-1 Inventories After...

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7-17Inventories
Inventories1Describe the importance of control overinventories.2Describe three inventory cost flowassumptions and how they impact theincome statement and balance sheet.3Determine the cost of inventory under theperpetual inventory system, using theFIFO, LIFO, and average cost methods.After studying this chapter, you should be able to:7-2
Inventories(continued)After studying this chapter, you should be able to:4Describe the cost of inventory under theperiodic inventory system, using theFIFO, LIFO, and average cost methods.5Compare and contrast the use of the threeinventory costing methods.6Describe and illustrate the reporting ofmerchandise inventory in the financialstatements.7-3
Describe theimportance of controlover inventory.17-4
7-5Two primary objectives ofcontrol over inventory are:1.Safeguarding the inventory,and2.Properly reporting it in thefinancial statements.1
7-6Thepurchase orderauthorizes thepurchase of the inventory from anapproved vendor.Thereceiving reportestablishes aninitial record of the receipt of theinventory.The amount of inventory is alwaysavailable in thesubsidiary inventoryledger.1
7-7Controls for safeguarding inventoryshould include security measures toprevent damage and customer oremployee theft. Some examples ofsecurity measures include thefollowing:1.Storing inventory in areas that arerestricted to only authorizedemployees.1
7-82.Locking high-priced inventoryin cabinets.3.Using two-way mirrors, cameras,security tags, and guards.1
7-9Aphysical inventoryor countof inventory should be takennear year-end to make surethat the quantity of inventoryreported in the financialstatements is accurate.1
7-10Describe the three inventorycost flow assumptions andhow they impact the incomestatement and balancesheet.27-10
7-11Inventory Costing Methods2
7-12May 10 Purchase1$918Purchase11324Purchase114Total3$36Average cost per unit $12 ($36 ÷ 3 units)2
7-13Assume that one unit is sold on May 30 for $20.Depending upon which unit was sold, the gross profitvaries from $11 to $6 as shown below:2
7-14Under thespecific identificationinventory cost flow method, theunit sold is identified with aspecific purchase.Not practical unless each inventoryunit can be separately identified..2
7-15Under thefirst-in, first out (FIFO)inventory cost flow method, thefirst units purchased are assumed tobe sold and the ending inventory ismade up of the most recentpurchases.2
7-16Under thelast-in, first out (LIFO)inventory cost flow method, thelast units purchased are assumedto be sold first and the endinginventory is made up of the firstunits purchased.2
7-17Under theaverage inventory costflow method, the cost of the unitssold and in ending inventory is anaverage of the purchase costs.

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