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Unformatted text preview: 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 Merchandisers : Manufacturers : ◦ 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 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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This test prep was uploaded on 02/20/2009 for the course H ADM 121 taught by Professor Ddittman during the Spring '07 term at Cornell.
- Spring '07