Chapter 5 - Chapter 5 Inventory Business Accounting and You...

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Chapter 5: InventoryBusiness, Accounting, and YouoInventory = vital for merchandising businessesCreating a return by taking risks (buying inventory)Net income only if profit covers operating expensesoAccounting for InventoryCount, cost of items sold, cost of items ownsPrices change, must keep up to datedetermines whether the business is profiting / losingWHAT INVENTORY COSTING METHODS ARE ALLOWED?oMerchandise inventory– the goods that a merchandiser has available to sell to its customersLargest current asset for merchandising businessesoManufacturer InventoryFinished goods inventory– goods that a merchandiser holds for sale to its customersRaw materials inventory– merchandiser uses to produce the goodsit sellsWork in process inventory– partially completed (produced) goodsoPerpetual Inventory SystemAuto updates general ledger COGS and Inventory accounts with each purchase transactionWhen purchase large quantities of one good – inflation can occur-Goods cost more when buy next timeDifferent methods to assign inventory cost:oSpecific identification method(specific-unit-cost) – assumes that the cost assigned to an inventory item when it is sold is the actual cost paid for thatitemCOGS = actual cost of items sold
Ending Inventory = actual cost of goods remaining in inventoryCost flow of goods = physical flow of goods t/businessoFirst-in, First-out(FIFO method) – assumes that the earliest inventory costs are assigned to items as they are soldCOGS = oldest cost incurred to purchase inventory itemsEnding Inventory = most recent costs incurred to purchase inventory itemsCost flow of goods – closely match physical flow of goods t/businessoLast-in, First-out(LIFO method) – assumes that the most recent inventory costs are assigned to items as they are soldCOGS = latest costs incurred to purchase inventory itemsEnding Inventory = earliest costs incurred to purchase inventoryCost flow of goods = opposite of physical flow of goods t/businessoAverage Cost– assumes that a weighted-average cost per item of the entire inventory purchased is assigned to items as they are soldCOGS / Ending Inventory = average of the cost incurred to purchase inventory items^ accounts fall between amounts using LIFO and FIFOCost Flow Vs. Physical Flow of InventoryoWhat determines inventory costing methodFlow of inventory through the accounting recordsoInventory layer– a record of the quantity of and the cost of inventory items made in a single purchaseoFlow of inventory

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