CHAPTER 8 REVIEW - CHAPTER8REVIEW 1 Careful attention is...

Info icon This preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
CHAPTER 8 REVIEW 1. Careful attention is given to the inventory account by many business organizations because it represents one of the most significant assets held by the enterprise. Inventories are of particular importance to merchandising and manufacturing companies because they represent the primary source of revenue for the organization. Inventories are also significant because of their impact on both the balance sheet and the income statement. Chapter 8 initiates the discussion of the basic issues involved in recording, classifying, and valuing items classified as inventory. Inventory Classifications and Control 2. (S.O. 1) Inventories are asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. Merchandise inventory refers to the goods held for resale by a trading concern. The inventory of a manufacturing firm is composed of three separate items: raw materials, work in process, and finished goods. 3. Inventory planning and control is of vital importance to the success of a trading or manufacturing enterprise. If an excessive amount of inventory is accumulated, there is the danger of loss owing to obsolescence. If the supply of inventory is inadequate, the potential for lost sales exists. This dilemma makes inventory an asset to which management must devote a great deal of attention. 4. (S.O. 2) Inventory records may be maintained on a perpetual or periodic inventory system basis. A perpetual inventory system provides a means for generating up-to-date records related to inventory quantities. Under this inventory system, data are available at any time relative to the quantity of material or type of merchandise on hand. In a perpetual inventory system, purchases and sales of goods are recorded directly in the Inventory account as they occur. A Cost of Goods Sold account is used to accumulate the issuances from inventory. The balance in the Inventory account at the end of the year should represent the ending inventory amount. 5. When the inventory is accounted for on a periodic inventory system, the acquisition of inventory is debited to a Purchases account. Cost of goods sold must be calculated when a periodic inventory system is in use. The computation of cost of goods sold is made by adding beginning inventory to net purchases and then subtracting ending inventory. Ending inventory is determined by a physical count at the end of the year under a periodic inventory system. Even in a perpetual inventory system, a physical inventory count at year-end is normally taken due to the potential for loss, error, or shrinkage of inventory during the year.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
6. Reconciliation between the recorded inventory amount and the actual amount of inventory on hand is normally performed at least once a year.
Image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern