CH 8 - Notes.word


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CHAPTER 8 INVENTORY INVENTORY : Definition of Inventory (Section 3031.06): Inventories are “assets: has specific characteristics Held for sale in the ordinary course of business; Intention of mgmt is not to keep these items on hand for very long In the process of production for such sale; or In the form of materials or supplies to be consumed in the production pro- cess or in the rendering of services.” Clothing Manufacturer = take fabric and make it into clothes INVENTORY CLASSIFICATION : Inventory is classified as a current asset A merchandising company: has one inventory account on the balance sheet called Merchandise Invent- ory; 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 ma- terials, 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 Perpetual System = maintains a continuous record of inventory changes Periodic System = updates inventory records in the ledger only periodically Raw Materials Direct Labor Mft Overhead WIP Inventory COGS Finished Goods $$$ COGM
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PERPETUAL SYSTEM : Purchases of inventory and cost of inventory sold are recorded directly in the In- ventory 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 cap- tured in a separate account called Inventory Over + 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 in- ventory 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 at least once a year as there is the risk of loss and errors (e.g. waste, breakage, theft)
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This note was uploaded on 01/09/2010 for the course ACCT 351 taught by Professor Desmondtsang during the Spring '08 term at McGill.

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