AC 101 Fall 2007 Ch 8

AC 101 Fall 2007 Ch 8 - Valuing Inventories Chapter Eight...

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Valuing Inventories Chapter Eight Prepared by: Sarita Sheth Santa Monica College
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Chapter Eight Objectives 1. Explain how merchandising and manufacturing companies value inventory and determine costs of goods sold. 2. Understand the periodic and perpetual methods for recording inventory. 3. Recognize the implications of alternative inventory costing methods for income measurement, cash flows, and asset valuation. 4. Read and interpret inventory footnote disclosures.
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Inventories Goods that firms make or buy to sell to customers. Using accrual accounting, inventories are costs that will generate future revenue. We look at inventory from perspective of: Merchandising firm buys completed product and sells to consumers Manufacturing firm makes products internally.
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Stages of Inventory 1. Raw materials- goods that have not been put into manufacturing process. 2. Work in process (WIP) - inventory that is partially processed and not complete. 3. Finished goods- the completed product ready to be sold to customers.
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Valuing Inventory Firm records inventory on its balance sheet at the acquisition cost. GAAP requires that a firm value inventory of the lower of: The cost value or Market value (the replacement cost or net realizable value).
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Inventory Costs For a merchandiser, inventory costs are the purchase price of the products and transportation costs. For the manufacturer: Beginning inventory WIP +Direct Labor costs incurred +Direct Materials applied to production +Factory OH costs incurred -Ending Inventory work in process Cost of Goods Manufactured
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Inventory Costs Now use Cost of Goods Manufactured:
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AC 101 Fall 2007 Ch 8 - Valuing Inventories Chapter Eight...

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