ch06 - CHAPTER 6 Reporting and Analyzing Inventory CHAPTER...

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CHAPTER 6 Reporting and Analyzing Inventory CHAPTER OVERVIEW Chapter 6 begins with a discussion of the steps in determining inventory quantities. You will learn about the various ways to assign costs to inventory and about the financial statement and tax effects of the cost flow methods. Valuing inventory at the lower of cost or market is discussed, as are the inventory turnover ratio and LIFO reserve. You will apply inventory cost flow methods to perpetual inventory records, and, finally, you will see effects of inventory errors on the income statement and the balance sheet. REVIEW OF SPECIFIC STUDY OBJECTIVES ¿ A merchandising firm has only one inventory account , called Merchandise Inventory. A manufacturing firm has three inventory accounts : finished goods inventory, consisting of goods completed and awaiting sale; work in process inventory, consisting of goods partially completed; and raw materials inventory, consisting of materials waiting to be placed into production. SO1. Describe the steps in determining inventory quantities. ¿ Determining inventory quantities involves two steps : taking a physical count of goods on hand and determining ownership of goods . ¿ A physical count involves counting, weighing, or measuring each kind of inventory on hand at the end of the accounting period. It can be a time-consuming and formidable task. The quantity of each kind of inventory is listed on inventory summary sheets and should be verified by a second employee or supervisor.
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Kimmel Accounting: Tools for Business Decision Making 6-2 ¿ Determining ownership of goods can be complex because of situations like the following: inventory in a warehouse does not belong to the owner of the warehouse, and a company's inventory may not be physically present at the time of the physical count. ¿ If goods are in transit at the time of the physical count, then ownership is deter- mined by who has legal title to the goods , and legal title is determined by the terms of the sale . When terms are FOB (free on board) shipping point , ownership passes to the buyer when the goods arrive at the public carrier . If goods are being shipped from Atlanta, GA, to Charleston, SC, and terms are FOB shipping point, the buyer in Charleston has legal title to and ownership of the inventory when the seller in Atlanta delivers the goods to the common carrier in Atlanta. When terms are FOB destination , ownership of the goods remains with the seller until the goods reach the buyer . In our example, if the goods are shipped FOB destination, the seller in Atlanta has title to the goods until they reach the buyer in Charleston. ¿ Consigned goods pose another problem. Charlie takes goods that he wishes to sell to Barb's place of business. Barb agrees to try to sell them for Charlie, for a commission, of course. Charlie is at all times the owner of the goods until they sell. Even though the goods are physically at Barb's place of business, Barb never has
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ch06 - CHAPTER 6 Reporting and Analyzing Inventory CHAPTER...

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