chapter8_notes

chapter8_notes - Chapter 8: Inventory Inventory: Definition...

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Chapter 8: Inventory Inventory : Definition of Inventory (Section 3031.06): 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.” Inventory Classification: Inventory is classified as a current asset A merchandising company: has one inventory account on the balance sheet called Merchandise Inventory; the cost of the inventory sold is transferred to Cost of Goods Sold (COGS) on the income statement A manufacturing company: will normally have three inventory accounts on the balance sheet: raw materials, work in process and finished goods; Cost of Goods Manufactured (COGM) is used by a manufacturer which is similar to the COGS Inventory Cost Flows: Inventory Control: An accurate inventory accounting system is important for: - ensuring availability of inventory items - preventing excessive accumulation of inventory items Just-in-time (JIT) inventory order systems have helped reduce inventory levels The perpetual system maintains a continuous record of inventory changes The periodic system updates inventory records in the ledger only periodically ** look at industry averages in order to decide when to replace or renew inventory stock
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Perpetual System: Purchases of inventory and cost of inventory sold are recorded directly in the Inventory account Cost of freight, purchase returns and allowances, and purchase discounts are all recorded in the Inventory account Cost of Goods Sold (COGS) is debited and Inventory is credited when inventory is sold A subsidiary ledger is maintained for individual inventory items on hand Periodic inventory counts are still required to ensure reliability Any differences between the inventory balance and the physical count are captured in a separate account called Inventory Over and Short (or may be recorded as an adjustment to Cost of Goods Sold) Periodic System: Inventory purchases are recorded as a debit to a Purchases account Cost of Goods Sold and Inventory accounts are not kept up to date The quantity and cost of inventory on hand is determined by taking a physical inventory count Cost of Goods Sold is determined at the end of the period Under both periodic and perpetual inventory systems, physical counts of inventory are conducted
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This note was uploaded on 11/16/2009 for the course BBA ADMN1107 taught by Professor M.o'gay during the Fall '08 term at Laurentian.

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chapter8_notes - Chapter 8: Inventory Inventory: Definition...

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