Acc011_04_Inventory

Acc011_04_Inventory - Inventory The following is from the...

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Inventory
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The following is from the footnotes accompanying the annual report of Sunoco dated December 31,2002. The current replacement cost of all inventories valued at LIFO exceeded their carrying value by $962 and $516 million at December 31, 2002 and 2001, respectively. During 2002, Sunoco reduced certain inventory quantities which were valued at lower LIFO costs prevailing in prior years. The effect of this reduction was to increase 2002 results of operations by $5 million after tax.
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Two items to note Inventory is not reported on the balance sheet at its replacement cost. The effect of holding undervalued inventory on the balance sheet is that selling it increases your income.
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Two types of businesses where inventory is a major balance sheet item: 1) Trading Concern -purchases finished goods and sells to others; has one inventory account 2) Manufacturer -manufactures goods for sale; has three inventory accounts-raw materials, work in process, and finished goods Inventory is not a major balance
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Two types of inventory systems 1) Perpetual 1) Periodic
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Perpetual • Purchases and goods are recorded directly to the inventory account. A Cost of Goods Sold account is used to accumulate issuances from inventory. Even though records are up to date, a yearly count must be taken. Any difference between the physical count and the accounting records must be corrected for through an adjusting entry.
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Periodic • A purchases account is used to record all the purchases during the year. At the end of the period a count is taken and the balance in the inventory account is adjusted. Cost of Goods Sold is simply the Beginning Inventory plus Purchases less Ending Inventory.
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Which goods should be included in inventory? • Technically, all goods to which the company has legal title should be included in inventory. In practice acquisitions are recorded when goods are received. At year-end the company must carefully ensure that all goods counted as inventory actually belong to the
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Goods in Transit • Merchandise in transit at the end of the period, to which legal title has passed, should be recorded as purchases of the fiscal period .
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Example • Goods are often shipped F.O.B. shipping point . For these goods the title passes to the buyer as soon as they are shipped. If these goods are in transit at year-end they should be included in the inventory of the buyer. Note: do not neglect to recognize the associated
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Example • Goods are also shipped F.O.B. destination . For these goods the title passes to the buyer only upon receipt. If these goods are in transit at year- end these goods should be included in the inventory of the seller.
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Consigned Goods • Under a consignment the consignor ships goods to a consignee. The consignee acts as an agent for the consignor and tries to sell the goods. The goods remain property remain property of the consignor until sold by the consignee. Thus they should be included in the inventory of the consignor
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Example • Arnold Horshack, Proprietor
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Acc011_04_Inventory - Inventory The following is from the...

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