ch08 - Chapter 8 1 Chapter 8: Valuation of Inventories: A...

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Unformatted text preview: Chapter 8 1 Chapter 8: Valuation of Inventories: A Cost-Basis Approach AIM 3331-0U1 Summer 2009 Xinyi Lu Chapter 8 2 Objective 1. Identify major classifications of inventory. 2. Distinguish between perpetual and periodic inventory systems. 3. Identify the effects of inventory errors on the financial statements. 4. Understand the items to include as inventory cost. 5. Understand the cost flow assumptions used to account for inventories. Chapter 8 3 Inventories Inventories are: items held for sale, or goods to be used in the production of goods to be sold. Careful attention is needed for inventory account because: it represents one of the most significant assets held by the enterprise; it represents the primary source of revenue for many firms; it impacts on both the balance sheet and the income statement. Chapter 8 4 Inventory Classification Classification Businesses with Inventory: Merchandiser Manufacturer or Chapter 8 5 Inventory Classification Type of Business Merchandiser One inventory account Purchase goods ready for sale Balance Sheet (in t housands) Current asset s Cash 285,000 $ Mar ket able secur it ies 530,000 Account s r eceivable 149,000 Mer chandise invent or y 777,000 Pr epaids 33,000 Tot al cur r ent asset s 1,774,000 I nvest ment s: I nvesment in ABC bonds 321,657 I nvest ment in UC I nc. 253,980 Not es r eceivable 150,000 Land held f or speculat ion 550,000 Sinking f und 225,000 Pension f und 653,798 Chapter 8 6 Inventory Classification Type of Business Manufacturer Three accounts Raw materials Work in process Finished goods Balance Sheet (in t housands) Current asset s Cash 285,000 $ Mar ket able secur it ies 530,000 Account s r eceivable 149,000 I nvent or y Raw mat er ials 210,000 Wor k in pr ocess 417,000 Finished goods 150,000 Tot al invent or y 777,000 Pr epaids 33,000 Tot al cur r ent asset s 1,774,000 I nvest ment s: I nvesment in ABC bonds 321,657 Chapter 8 7 Flow of Costs Chapter 8 8 Inventory Planning and Control 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. Chapter 8 9 Inventory Planning and Control Two systems for maintaining inventory records: Perpetual system Periodic system Chapter 8...
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ch08 - Chapter 8 1 Chapter 8: Valuation of Inventories: A...

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