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ACCTG 471 CH 8-9 SG

ACCTG 471 CH 8-9 SG - ACCTG 471 EXAM 2 Study Guide CHAPTER...

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ACCTG 471 EXAM 2 Study Guide CHAPTER 8: Valuation of Inventories: A Cost Basis Approach Inventory: Asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. Inventory Classifications and Control o Manufacturing Raw Materials: cost assigned to goods and materials on hand but not yet placed into production Work In Process: cost of the raw material for these unfinished units, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs Finished Goods: costs identified with the completed but unsold units on hand at the end of the fiscal period o Merchandise: Refers to goods held for resale Perpetual Inventory o The costs of purchases and sales are recorded directly in the Inventory account o Purchases and Sales of goods are recorded directly in the Inventory account as they occur o A CGS account is used to accumulate issuances from inventory o The balance in inventory at the end of the year should represent the ending inventory amount Modified Perpetual o The cost of Purchases is recorded directly in the inventory account o The cost of Sales is not recorded at time of sale, but a record is kept of the number of units sold Periodic o The cost of purchases is recorded in a Purchases (temporary) account o The balance in the Inventory account remains unchanged during the period o No record is kept at the time of sale of the number or cost of the units sold o Quantity of goods at the end of the year is determined by physical count and the cost of EI is recorded o CGS=BI+Purchases-EI Basic Issues in Inventory Valuation o The physical goods to be included in Inventory (who owns it?) o The costs to be included in inventory (product vs. period (e.g. S&GA))
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o The cost flow assumption to be used (Specific Identification, Avg. Cost, FIFO, LIFO, etc.) Goods in Transit o Technically, purchases should be recorded when legal title passes to the buyer. 3 situations to watch for: F.O.B. Shipping Point: Title passes to buyer when the seller delivers good to the carrier F.O.B. Destination: Title stays with seller until reaches its destination Inventory out on consignment belongs to the consignor’s inventory (the consignor being the person who owned it in the first place)(Selling inventory for someone else) Special Sales Agreements (Exceptions to general rule of company with legal title records) o Sales with buy back agreements (Between manufacturers and retailers) In essence, the “seller” finances the cost of the inventory by transferring legal title to a 3 rd party and receiving “payment.” The “seller” then agrees to “buy” the inventory back at a specified price over a specified future period These transactions are often referred to as “parking transactions” because the seller simply parks the inventory on another firm’s balance sheet and uses it as a financing device
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ACCTG 471 CH 8-9 SG - ACCTG 471 EXAM 2 Study Guide CHAPTER...

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