This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: MAIN IDEAS IN CH 8 HANDOUT SOLUTION VALUATION OF INVENTORIES: A COST-BASIS APPROACH (NOTE: Handouts are not a substitute for reading and studying the text. Handouts do not cover everything that you need to know.) 1. The main ideas you should learn in this chapter include the following: SO1 IDENTIFY MAJOR CLASSIFICATIONS OF INVENTORY. S02 DISTINGUISH BETWEEN PERPETUAL AND PERIODIC INVENTORY SYSTEMS. S04 UNDERSTAND THE ITEMS TO INCLUDE IN INVENTORY COST. S05 DESCRIBE AND COMPARE THE COST FLOW ASSUMPTIONS USED TO ACCOUNT FOR INVENTORIES. SO9 IDENTIFY MAJOR ADVANTAGES AND DISADVANTAGES OF LIFO S010 UNDERSTAND WHY COMPANIES SELECT GIVEN INVENTORY METHODS. S03 IDENTIFY THE EFFECTS OF INVENTORY ERRORS IN FINANCIAL STATEMENTS. INTRODUCTION • CH 7-9 focus on the accounting rules for current assets and why these assets are important to a business. Recall that current assets are those assets expected to be cash or converted into cash with one year. In a typical business that sells merchandise, current assets include three principal assets (cash, accounts receivable, and merchandise inventory). These three assets connect to something very important called THE OPERATING CYCLE – the time it takes to convert cash back into cash. • From the ratio analysis we discussed in CH 5, it was easy to see how the inventory and accounts receivable turnovers were important benchmarks to assess the liquidity of TOOTSIE ROLL and PROCTOR & GAMBLE’S non-cash current assets. Inventories account for a substantial portion of current assets and are the key ingredient to turn cash outflows into cash inflows – the OPERATING CYCLE can’t be completed unless inventories are sold in a timely manner. As your text points out in the very first paragraph of the chapter, a substantial increase in inventories may be a leading indicator of an upcoming decline in profit margins – it may be an early warning sign that a market is in distress. It is a very important current asset that needs to be effectively managed. • Careful attention is given to inventory because it represents one of the most significant assets held by an enterprise. Inventories are of particular importance to merchandising and manufacturing companies because they represent the primary source of revenue for the organization. Inventories are also significant because of their impact on both the balance sheet and the income statement. CH 8 initiates the discussion of the basic issues involved in recording, classifying, and valuing items classified as inventory....
View Full Document
- Spring '10
- Accounting, Wendy's