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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:6-2
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 thethree inventory costing methods.6Describe and illustrate the reporting ofmerchandise inventory in the financialstatements.6-3
Describe theimportance of controlover inventory.16-4
6-5Two primary objectives of controlover inventory are:1.Safeguarding the inventory,and2.Properly reporting it in thefinancial statements.1Safeguarding Inventory
6-6•Thepurchase 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.1Safeguarding Inventory
6-7Controls 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.1Safeguarding Inventory
6-9Aphysical inventoryor countof inventory should be takennear year-end to make surethat the quantity of inventoryreported in the financialstatements is accurate.1Reporting Inventory
6-10Describe the three inventorycost flow assumptions andhow they impact the incomestatement and balancesheet.26-10
6-11Inventory Costing Methods2
6-12May 10 Purchase1$918Purchase11324Purchase114Total3$36Average cost per unit $12 ($36 ÷ 3 units)2Basic Data
6-13Assume 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:2Inventory Cost FlowAssumptions
6-14Under thespecific identificationinventory cost flow method, theunit sold is identified with aspecific purchase.Not practical unless each inventoryunit can be separately identified..2Inventory Cost FlowAssumptions
6-15Under 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.2Inventory Cost FlowAssumptions
6-16Under thelast-in, first out(LIFO)inventory cost flowmethod, the last units purchasedare assumed to be sold first andthe ending inventory is made upof the first units purchased.