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

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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.
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6. Reconciliation between the recorded inventory amount and the actual amount of inventory on hand is normally performed at least once a year. This is called a
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This note was uploaded on 09/30/2008 for the course ACCY 206 taught by Professor Madlinger during the Spring '08 term at Northern Illinois University.

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

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