Ch 10 - Chapter 10 Cost of Goods Sold and Inventory...

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Chapter 10 – 1 Chapter 10 Cost of Goods Sold and Inventory SOLUTIONS 1. a. inventory b. no; classified as property, plant, and equipment c. no; classified as office supplies d. inventory e. no; classified as property, plant, and equipment f. inventory 2. Raw materials are goods acquired in a relatively undeveloped state that will eventually compose a major part of the finished product. Work in process consists of partly finished products. Finished goods are the completed products waiting for sale. 3. When goods are shipped FOB destination, the seller owns the goods while in transit. 4. The accounting difficulty associated with consigned goods is that inventory that is in the hands of a dealer may actually belong to the supplier; consigned goods should be reported as inventory in the balance sheet of the supplier/owner, not in the balance sheet of the dealer where the goods are located. Auditing consigned inventory presents the auditor with a special set of problems. Inventory that is on the premises may not belong to the company because the company is holding it on consignment. 5. The cost of goods acquired for resale by a merchandising firm includes the purchase price, freight, and receiving costs. 6. The cost of work-in-process inventory is the sum of the cost of the raw materials, the cost of the production labor, and some share of the cost of the manufacturing overhead required to keep the factory running. 7. The purpose of activity-based costing (ABC) is to have better information for internal decision- making. ABC systems strive to allocate overhead based on clearly identified cost drivers— characteristics of the production process (e.g., number of required machine reconfigurations or average frequency of production glitches requiring management intervention) that are known to create overhead costs. 8. Inventory purchased or produced during a period will be found on the Balance Sheet as part of Inventory (inventory not yet sold) or on the Income Statement as part of Cost of Goods Sold (inventory sold during the period). 9. A perpetual inventory system tracks changes in inventory levels on a continuous basis, recording each individual purchase and sale to maintain a running total of the inventory balance. A periodic inventory system relies on periodic inventory counts (i.e., once a quarter or once a year) to reveal which inventory items have been sold. 10. Yes, the physical count can be compared to the recorded inventory balance to see whether any inventory has been lost or stolen.
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Chapter 10 – 2 11. Overstating the amount of ending inventory increases Net Income. This effect can be seen by analyzing the computation: Beginning Inventory + Purchases = Goods Available for Sale – Ending Inventory = Cost of Goods Sold By overstating Ending Inventory, Cost of Goods Sold is understated, which in turn overstates Net Income and makes the manager look good. 12.
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Ch 10 - Chapter 10 Cost of Goods Sold and Inventory...

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