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Unformatted text preview: Question 8-1 Question 8-2 Question 8-3 Perpetual System Periodic System (1) purchase of merchandise debit inventory debit purchases (2) sale of merchandise debit cost of goods sold ; credit inventory no entry (3) return of merchandise credit inventory credit purchase returns Question 8-4 Chapter 8 Inventories: Measurement QUESTIONS FOR REVIEW OF KEY TOPICS Inventory for a manufacturing company consists of (1) raw materials, (2) work in process, and (3) finished goods. Raw materials represent the cost, primarily purchase price plus freight charges, of goods purchased from other manufacturers that will become part of the finished product. Work-in-process inventory represents the products that are not yet complete. The cost of work in process includes the cost of raw materials used in production, the cost of labor that can be directly traced to the goods in process, and an allocated portion of other manufacturing costs, called manufacturing overhead. When the manufacturing process is completed, these costs that have been accumulated in work in process are transferred to finished goods . Beginning inventory plus net purchases for the period equals cost of goods available for sale. The main difference between a perpetual and a periodic system is that the periodic system allocates cost of goods available for sale to ending inventory and cost of goods sold only at the end of the period. The perpetual system accomplishes this allocation by decreasing inventory and increasing cost of goods sold each time goods are sold. (4) payment of freight debit inventory debit freight-in Answers to Questions (continued) Question 8-5 Question 8-6 Question 8-7 Question 8-8 Question 8-9 Inventory shipped f.o.b. shipping point is included in the inventory of the purchaser when the merchandise reaches the common carrier. Laetner Corporation records the purchase in 2006 and includes the shipment in its ending inventory. Bockner Company records the sale in 2006. Inventory shipped f.o.b. destination is included in the inventory of the seller until it reaches the purchaser’s location. Bockner would include the merchandise in its 2006 ending inventory and the sale/purchase would be recorded in 2007. A consignment is an arrangement under which goods are physically transferred to another company (the consignee), but the transferor (consignor) retains legal title. If the consignee can’t find a buyer, the goods are returned to the consignor. Goods held on consignment are included in the inventory of the consignor until sold by the consignee. By the gross method purchase discounts not taken are viewed as part of inventory cost. By the net method purchase discounts not taken are considered interest expense, because they are viewed as compensation to the seller for providing financing to the buyer....
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- Spring '09
- Financial Accounting, ... ..., FIFO and LIFO accounting, Maytag