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Unformatted text preview: CHAPTER 3 ACCOUNTING FOR MERCHANDISE INVENTORIES 1. WHAT ARE MERCHANDISING ACTIVITIES? Manufacturer wholesaler- retailer customer Merchandising companies 2. OPERATING CYCLE Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. 3. WHAT IS INVENTORY . FRS 102 : Inventories are assets: (a) held for sale in the ordinary course of business; (b) In the process of production for such sale; or (c) in the form of materials or supplies to be consumed in the production process or in the rendering of services 4. INVENTORY CONTROL . why it is important? "Inventory is a significant asset and for many companies the largest asset Inventory is central to the main activity of merchandising and manufacturing companies. Mistakes in determining inventory cost can cause critical errors in financial statement. To protect from external risks (fire, flood and theft) and internal fraud by employee. 5. INVENTORY COSTS AND RELATIONSHIP a) if inventory is overstated COGS is understated --- gross profit / net income is overstated b) If inventory is understated -- ---- ending owner's equity is overstated. COGS is overstated -- gross profit/ net income is understated ending owner's equity is understated. 21...
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