LESSON 6 - 1 LESSON6ReportingandAnalyzingInventory...

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Classifying Merchandising and Manufacturing Companies’ Inventories In Lesson 5, you were taught that Manufacturers convert Raw Materials into what the Manufacturers call Finished Goods, and that when a Manufacturing company sells its Finished Goods to a Merchandising Company, the merchandising Company calls the Finished Goods it purchases its “Merchandise Inventory”. That is, the “Merchandise Inventories” that Merchandisers purchase from Manufacturers are the same inventories” that the manufacturers’ call their “Finished Goods”. In this course, we focus primarily on accounting for Merchandising Businesses, although we do ask that you learn the three types of inventories accounted for by Manufacturers in their Balance Sheet, which are Raw Materials , Work-In-Process and Finished Goods . Work-In-Process inventories are the intermediate production details and components that manufacturers produce leading up to the final production of the Finished Goods. For example, when Lockheed Martin produces the F-35 Lightning II fighter aircraft, the company first produces the center fuselage, which is a portion of the center part of the airplane, and then later joins this component to other components the company has produced, such as the wings, to produce an F-35. For Lockheed Martin, the center fuselage and wings are Work-In-Process inventories, and the F-35 airplanes are Finished Goods inventories. In building the Work-In-Process (also called “WIP”) components, Lockheed Martin purchases Raw Materials, such as titanium, fasteners, wirings, and many other items from its Suppliers, and uses these Raw Materials in producing both the WIP components and the Finished Goods airplanes. Lockheed Martin, General Motors, Ford, Boeing, and all other manufacturers use these same general inventory classifications in their Balance Sheets to summarize the dollar values of their inventories. That is, all manufacturers summarize the values of their inventories into just three categories in their Balance Sheet: (1) Raw materials (2) Work-In-Process and (3) Finished Goods. Of course, these companies’ internal accounting systems (their ERP systems) track the Raw Materials, WIP and Finished Goods at a much more detailed level, including assigning part numbers, quantities and unit costs to each Raw material, WIP and Finished Goods inventory item. In your Managerial Accounting course (the second Accounting Principles course at TCC, ACCT 2302 – Managerial Accounting) you will learn more about accounting for Raw Materials, Work-In-Process and Finished Goods inventories, when you study Job-Order Costing. In this course, you learn the Financial Statement categories for manufacturing inventories, which are Raw Materials, Work-in-Process and Finished Goods, and that the manufacturers’ Finished Goods are the same Goods that Merchandisers call “Merchandise Inventory”, when they purchase Merchandise Inventory (Finished Goods) from the Manufacturers. 1
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This note was uploaded on 07/16/2010 for the course ACCT 2302 taught by Professor Dr.winking during the Spring '10 term at Tulane.

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LESSON 6 - 1 LESSON6ReportingandAnalyzingInventory...

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