ch06 - CHAPTER 6 Inventories STUDY OBJECTIVES 1. DESCRIBE...

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CHAPTER 6 Inventories STUDY OBJECTIVES 1. DESCRIBE THE STEPS IN DETERMINING IN- VENTORY QUANTITIES. 2. PREPARE THE ENTRIES FOR PURCHASES AND SALES OF INVENTORY UNDER A PERIODIC INVENTORY SYSTEM. 3. DETERMINE COST OF GOODS SOLD UNDER A PERIODIC INVENTORY SYSTEM. 4. IDENTIFY THE UNIQUE FEATURES OF THE INCOME STATEMENT FOR A MERCHANDISER USING A PERIODIC INVENTORY SYSTEM. 5. EXPLAIN THE BASIS OF ACCOUNTING FOR INVENTORIES, AND DESCRIBE THE INVENTORY COST FLOW METHODS. 6. EXPLAIN THE FINANCIAL STATEMENT AND TAX EFFECTS OF EACH OF THE INVENTORY COST FLOW METHODS. 7. EXPLAIN THE LOWER OF COST OR MARKET BASIS OF ACCOUNTING FOR INVENTORIES. 6-1
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8. INDICATE THE EFFECTS OF INVENTORY ERRORS ON THE FINANCIAL STATEMENTS. 9. COMPUTE AND INTERPRET INVENTORY TURNOVER. *10. DESCRIBE THE TWO METHODS OF ESTIMATING INVENTORIES. *11. APPLY THE INVENTORY COST FLOW METHODS TO PERPETUAL INVENTORY RECORDS. 6-2
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CHAPTER REVIEW Classifying Inventory 1. (S.O. 1) Merchandise inventory has two common characteristics: (a) it is owned by the company and (b) it is in a form ready for sale in the ordinary course of business. 2. A manufacturer's inventory is usually classified into three categories: a. Finished goods that are completed and ready for sale. b. Work in process that is in various stages of production but not yet completed. c. Raw materials that are on hand waiting to be used in production. Determination of Inventory Quantities 3. The determination of inventory quantities involves (a) taking a physical inventory of goods on hand and (b) determining the ownership of goods. 4. Taking a physical inventory involves counting, weighing or measuring each kind of inventory on hand. Internal control procedures should be followed in taking the inventory in order to minimize errors. 5. For goods in transit, legal title is determined by the terms of sale. When the terms are: a. FOB (free on board) shipping point, ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. b. FOB destination, legal title to the goods remains with the seller until the goods reach the buyer. 6. Under a consignment arrangement, the holder of the goods (called the consignee) does not own the goods. Ownership remains with the shipper of the goods (consignor) until the goods are actually sold to a customer. Consigned goods should be included in the consignor's in- ventory not the consignee's inventory. Inventory Accounting Systems 7. One of two basic systems of accounting for inventories may be used: (1) the perpetual in- ventory system, or (2) the periodic inventory system. This chapter discusses and illustrates the periodic inventory system. Periodic Inventory System
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ch06 - CHAPTER 6 Inventories STUDY OBJECTIVES 1. DESCRIBE...

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