lec11 - 1 Inventories 15.511 Corporate Accounting Summer...

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Unformatted text preview: 1 Inventories 15.511 Corporate Accounting Summer 2004 Professor SP Kothari Sloan School of Management Massachusetts Institute of Technology June 24, 2004 2 Inventory z Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of business 3 Inventory z Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of business z Inventory is recorded on the balance sheet at the lower of the cost or the market value of the inventory. 4 Inventory: Lower of cost or market. Why? $B/S Inventory value Cost Inventory value on the balance sheet Market value of Inventory 5 Inventory z Definition: Inventory is defined as goods held for sale in the normal course of business or items used in the manufacture of products that will be sold in the normal course of business z The inventory is recorded on the balance sheet at the lower of the cost or the market value of the inventory. z The cost of inventory includes all costs necessary to bring the inventory to a saleable condition. 6 The Ins and Outs of Inventory Accounting The ins of inventory accounting The outs of inventory accounting Cost of goods available for sale Cost of goods sold Ending inventory Acquisition costs Beginning inventory BInv + Purchases = COGAS = COGS + EInv 7 Which costs ($) come out? Acquisition costs Cost of goods available for sale Cost of goods sold Ending inventory Beginning inventory BInv + Purchases = COGAS = COGS + EInv z How do we determine z which costs are expensed in COGS and z which costs remain in EInv? Need a cost flow assumption 8 The Key Equation Inventory Beg. Inventory Purchases/ Production Cost of goods sold nd. Inventory Beg. inventory + purchases/production - COGS = End. inventory 9 Which costs go in? z What units to include z FOB shipping point or destination: who owns goods in transit? z What costs to attach to the units z The cost of inventory includes all costs necessary to bring the inventory to a saleable condition. z All costs to acquire, manufacture, prepare z Includes shipping costs for retailers z Includes overhead costs (as well as direct labor and materials) for manufacturers z More on this in managerial accounting 10 Inventory in a Manufacturing Firm Materials Direct Labor Overhead Work in Process Finished Goods Cash or Payables 11 Inventory in a Manufacturing Firm Materials Direct Labor Overhead Work in Process Finished Goods Cash or Payables 12 Inventory in a Manufacturing Firm Buying of inputs Direct Material xx Direct Labor xx Overhead xx Payables or cash xx payment of salaries, purchase of materials) 13 Inventory in a Manufacturing Firm Materials Direct Labor Overhead Work in Process Finished Goods Cash or Payables 14 Inventory in a Manufacturing Firm Use inputs to manufacture goods Work in Process xx Direct Material xx Direct Labor xx Overhead xx (Use of inputs in production) 15...
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This note was uploaded on 04/05/2010 for the course FINANCE AN FRE6003 taught by Professor Marshall,ingridm during the Spring '09 term at NYU Poly.

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lec11 - 1 Inventories 15.511 Corporate Accounting Summer...

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