Chapter 7 - Inventory.docx

Chapter 7 - Inventory.docx - Chapter 7 Inventory Week 9...

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Chapter 7 – Inventory Week 9 – November 16, 2015 Inventory What happens when we sell something? What is the journal entry? DR. Cash or A/R xxx DR. Cost of Goods Sold xxx CR Revenue xxx CR Inventory xxx Note that there is an impact on the B/S and I/S Inventory is obviously key for retailers and manufacturers. Will not find much inventory, if any, in service industries except for materials used in providing the service to customers (i.e. Rogers TV – cable boxes, cables, etc.) Goods held for resale (inventory) in the regular course of business should be distinguished from fixed assets (buildings/equipment) for users on the balance sheet Inventory is subject to the Lower of Cost and Market rule (LCM) instead of being depreciated. Fixed assets are subject to the historical cost/depreciation rules. Both are a result of the conservatism concept under ASPE/IFRS Also note that for manufacturing companies, you may see inventory further sub-divided into raw materials inventory, work in process (WIP) inventory and finished goods inventory IFRS and Inventory Generally for most industries, IFRS requires inventory to be valued at cost on the balance sheet For retailers, inventory should be accounted for at “laid-down” cost which isn’t defined but can be interpreted to include all costs incurred to purchase or make the products ready for sale (ie. import duties, taxes, delivery charges, etc). For manufacturers, cost should include all costs incurred to produce the finished inventory. This cost includes direct labour, direct materials and a reasonable allocation of overhead. Overhead costs can include such costs as utilities, rent, depreciation on machines and equipment, mgmt salaries, etc. These costs are tricky to associate with product especially if multiple products are produced. This allocation is key topic in management
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