Chapter 7_Notes - Chapter 7 18/02/2009 19:07:00 Learning...

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Chapter 7 18/02/2009 20:07:00 Learning Objective 1 - to apply the cost principle to identify the amounts that  should be included in inventory and the matching principle to determine cost of goods  sold for typical retailers, wholesalers, and manufacturers. Types of inventory o Merchandise inventory includes goods held for resale in the normal  course of business. The goods usually are acquired in a finished  condition and are ready for sale without further processing. o Raw materials inventory includes items acquired for processing into  finished goods. o Work in process inventory includes goods in the process of being  manufactured but not yet complete. o Finished goods inventory includes manufactured goods that are  complete and ready for sale. Inventory cost includes the sum of the costs incurred in bringing an article to  usable or salable condition and location.  In addition to the invoice cost, other  common costs included in inventory are freight costs, inspection costs, and  preparation costs the company should cease accumulating costs in inventory when the raw  materials are ready for use or when the merchandise inventory is ready for  shipment Any additional costs related to selling the inventory (such as marketing costs  and salaries) are incurred after the inventory is ready for use.  So, they should  be included in selling, general, and administrative expenses in the period they  were incurred. When merchandise inventory is purchased, the merchandise inventory  account is increased.  When the goods are sold, cost of goods sold is  increased and merchandise inventory is decreased. When the inventory is complete and ready for sale, the related amounts of  work in process inventory are transferred to finished goods inventory. When  the goods are sold, cost of goods sold is increased and merchandise  inventory is decreased. Cost of Goods Sold o Cost of goods sold is an expense account.  o Cost of goods sold is calculated by multiplying the number of units sold  by their unit costs
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o cost of goods sold equation. Beginning inventory plus purchases  equals goods available for sale.  Goods available for sale minus  ending inventory equals cost of goods sold.    Learning Objective 2 - to report inventory and cost of goods sold using the four  inventory costing methods. Specific identification
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This note was uploaded on 02/20/2009 for the course AEM 221 taught by Professor Little,j. during the Fall '08 term at Cornell University (Engineering School).

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Chapter 7_Notes - Chapter 7 18/02/2009 19:07:00 Learning...

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