Chapter 7_StudyGuide

Chapter 7_StudyGuide - Chapter 7 Reporting and Interpreting...

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Chapter 7: Reporting and Interpreting Cost of Goods Sold and Inventory I) NATURE OF INVENTORY + COST OF GOODS SOLD: a Inventory : tangible property held either for sale or used to produce goods/services R EPORTED ON THE BALANCE SHEET AS A CURRENT ASSET b Types of Inventory : depend upon the business (merchandiser vs. manufacturer) M ERCHANDISERS : (wholesale, retail businesses) - Merchandise Inventory : goods held for sale, normally acquired in finished condition, ready for sale without further processing M ANUFACTURERS : - Raw Materials Inventory : items acquired for processing into finished goods, when they are used they become work in progress inventory - Work in Progress Inventory : goods in process of being manufactured - Finished Goods Inventory : manufactured goods, ready for sale Harley Davidson has only one account for raw materials and work in progress c Inventory Purchases and Costs : G OODS IN I NVENTORY ARE I NITIALLY R ECORDED AT C OST - Inventory Costs Includes the sum of costs incurred in bringing an article to usable or saleable condition and location Freight Charges (freight-in) Inspection + Preparation Costs T HE C OMPANY S HOULD C EASE A CCUMULATING C OSTS W HEN : - The raw materials are ready for use - Merchandise inventory is ready for shipment Any additional costs of selling inventory (marketing, dealer training sessions) are incurred after the inventory is ready for use and should be included in selling, general, and administrative expenses F LOW OF I NVENTORY C OSTS : 3 S TAGES Stage 3: Sale Increase Stage 1: Purchasing/ Stage 2: Additions to Cost of Goods Sold on Production Activities Inventory on Balance Sheet Income Statement Work in Progress Inventory : 2 more costs associated: Merchandise Purchased Increase Merchandise Inventory Sale Occurred, Increase Cost of Goods Sold Raw Materials Purchased, Direct Labor + Factory Overhead Incurred Sale Occurred, Increase Cost of Goods Sold Increase Raw Materials Inventory Increase Work in Progress Inventory
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Direct Labor - cost representing earnings of employees who worked on the products being manufactured Factory Overhead - cost representing all other manufacturing costs (heat, light, electricity) d Cost of Goods Sold = # units sold x their unit costs B EGINNING I NVENTORY : inventory present @ beginning of period P URCHASES : any new additions made to inventory G OODS A VAILABLE FOR S ALE : beginning inventory + purchases made E NDING I NVENTORY : what remains unsold @ end of period - Cost of Goods Sold Equation = Beginning Inventory + Purchases – Ending Inventory II) INVENTORY COSTING METHODS: 4 methods of assigning total
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