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510chapter8fall2009afterclass11242009

510chapter8fall2009afterclass11242009 - Chapter 8 Valuation...

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Chapter 8: Valuation of Inventories: A Cost Basis Approach    
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What’s Important Inventory classification and control Physical goods included in inventory Cost flow assumptions LIFO reserve LIFO liquidation Dollar value LIFO
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What’s not on the exam Special sales agreements Effect of inventory errors Costs included in inventory
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Inventories are: items held for sale, or goods to beused in theproduction of goods to besold. Inventory Classification and Systems Classification Merchandiser Merchandiser Manufacturer Manufacturer Businesses with Inventory: or
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Type of Business Merchandiser Merchandiser Oneinventory account Purchasegoods ready for sale Balance Sheet (in thousands) Current assets Cash 285,000 $ Marketable securities 530,000 Accounts receivable 149,000 Merchandise inventory 777,000 Prepaids 33,000 Total current assets 1,774,000 I nvestments: I nvesment in ABC bonds 321,657 I nvestment in UC I nc. 253,980 Notes receivable 150,000 Land held f or speculation 550,000 Sinking f und 225,000 Pension f und 653,798 Inventory Classification and Systems
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Type of Business Manufacturer Manufacturer Threeaccounts Raw materials Work in process Finished goods Balance Sheet (in thousands) Current assets Cash 285,000 $ Marketable securities 530,000 Accounts receivable 149,000 Inventory Raw materials 210,000 Work in process 417,000 Finished goods 150,000 Total inventory 777,000 Prepaids 33,000 Total current assets 1,774,000 Investments: Invesment in ABC bonds 321,657 Inventory Classification and Systems
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Flow of Costs Inventory Classification and Systems
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Inventory Systems Periodic : Inventory is not up to date. When goods arebought you usethe purchases account to record them. When inventory is sold you record theevent only onceat retail. You must count the inventory and updateit periodically. You must calculate the cost of goods sold as you havenot kept track of it. Perpetual system : Inventory account is increased and decreased as goods arebought and sold. Inventory is counted at the end of theperiod to confirm the accounting number. CGS is not a calculated figureas you keep track of it as goods aresold.
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Features: Inventory Classification and Systems Perpetual System 1. Purchases of merchandisearedebited to Inventory. 2. Freight-in, purchasereturns and allowances, and purchasediscounts are recorded in Inventory. 3. Cost of goods sold is debited and Inventory is credited for each sale. 4. Physical count doneto verify Inventory balance. Theperpetual inventory systemprovides a continuous record of Inventory and Cost of Goods Sold.
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Features: Inventory Classification and Systems Periodic System 1. Purchases of merchandisearedebited to Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Purchases, net 800,000 Goods availablefor sale 900,000
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| 1. Beginning inventory (100 units at $7 = 700) | 2. Purchase 900 units at $7: | | Inventory 6,300 | Purchases 6,300 Accounts payable 6,300 | Accounts payable 6,300 | 3. Sale of 600 untis at $14: | | Accounts receivable 8,400 | Accounts receivable 8,400 Sales 8,400 | Sales 8,400 Cost of goods sold 4,200 | Inventory 4,200 | | 4. Adjusting entries (ending inventory = 400 units @ $7 = $2,800) | No Entry Necessary | Inventory
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