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Unformatted text preview: CHAPTER 7 DISCUSSION QUESTIONS 1. A manufacturing firm has three types of in- ventories: (1) raw materials, (2) work-in-pro- cess, and (3) finished goods. Raw materials are goods acquired in an undeveloped state that compose a major part of a finished product. Work-in-process inventory is the partly finished products. Finished goods are the completed products waiting for sale. 2. The cost of inventory consists of all the costs involved in buying and preparing mer- chandise for sale. For a manufacturing com- pany, inventory cost for raw materials gen- erally includes the purchase price paid for the materials, freight costs, and receiving and storage costs. The cost of work-in-pro- cess inventory includes the cost of raw ma- terials, the cost of production labor, and some share of the cost of the manufacturing overhead required to keep the factory run- ning. The cost of finished goods inventory is the total of the materials, labor, and manu- facturing overhead costs used in the produc- tion process for those items. 3. It is more difficult to account for the invent- ory of a manufacturing firm than for a mer- chandising firm because the former has three different types of inventories: raw ma- terials, work-in-process, and finished goods. In addition, the work-in-process and finished goods inventories are composed of raw ma- terials, labor, and manufacturing overhead. Often, it is difficult to measure the amount of labor and manufacturing overhead that should be included in the inventory amounts. 4. The buyer owns merchandise being shipped under the terms FOB shipping point; thus, the buyer would generally pay the shipping costs and be responsible for any other own- ership costs during shipping. 5. The cost of inventory is transferred from an asset to an expense when the inventory is sold. Until sold, inventory is a current asset on the balance sheet. When sold, it be- comes part of the cost of goods sold on the income statement. 6. With good internal control procedures, a perpetual inventory record provides better control over inventory because it always shows the amount of inventory that should be in the warehouse (except for theft). A periodic inventory record shows only the amount of inventory that was on hand at the beginning of the period. With the periodic method, the inventory account is not adjus- ted until the next physical count is taken, usually at the end of an accounting period. 7. Purchase discounts and purchase returns are accounted for differently with the two methods. With the periodic method, both discounts and returns are accounted for by using separate accounts (Purchase Dis- counts and Purchase Returns); these are contra accounts to the purchases account....
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- Spring '08
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