Chapter 6 class notes (Kimmel}

Accounting: Tools for Business Decision Making

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Chapter 6: Reporting and Analyzing Inventories I. Recall from chapter 5 that inventory is a current asset on the balance sheet until it is sold, then it becomes an expense (cost of goods sold), to match the cost of the inventory sold with the sales revenue. In a merchandising company, inventory consists of many different items. These items have two common characteristics: (1) they are owned by the company and (2) they are in a form ready for sale to customers. Only one inventory classification, merchandise inventory , is needed to describe the many different items that make up the total inventory. No matter whether they are using a periodic or perpetual inventory system, all companies need to determine inventory quantities at the end of the accounting period. 2. Companies using a period inventory system - (inventory account is not updated until the end of the period when a physical count is taken) - must take a physical inventory for two different purposes: (1) to determine the inventory on hand at the balance sheet date and (2) to determine the cost of goods sold for the period. 3. If using a perpetual inventory system - (inventory and cost of goods sold are continuously updated) - companies take a physical inventory at year-end for two purposes: (1) to check the accuracy of their perpetual inventory records and (2) to determine the amount of inventory lost due to wasted raw materials, shoplifting or employee theft (shrinkage). Determining inventory quantities involves two steps:
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Chapter 6 class notes (Kimmel} - Chapter 6 Reporting and...

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