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WRD_ch07 - 7 Inventories 7-1 Inventories After studying...

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7-1 7 Inventories
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Inventories 1 Describe the importance of control over inventories. 2 Describe three inventory cost flow assumptions and how they impact the income statement and balance sheet. 3 Determine the cost of inventory under the perpetual inventory system, using the FIFO, LIFO, and average cost methods. After studying this chapter, you should be able to: 7-2
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Inventories (continued) After studying this chapter, you should be able to: 4 Describe the cost of inventory under the periodic inventory system, using the FIFO, LIFO, and average cost methods. 5 Compare and contrast the use of the three inventory costing methods. 6 Describe and illustrate the reporting of merchandise inventory in the financial statements. 7-3
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Describe the importance of control over inventory. 1 7-4
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7-5 Two primary objectives of control over inventory are: 1. Safeguarding the inventory, and 1. Properly reporting it in the financial statements. 1
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7-6 The purchase order authorizes the purchase of the inventory from an approved vendor. The receiving report establishes an initial record of the receipt of the inventory. The amount of inventory is always available in the subsidiary inventory ledger . 1
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7-7 Controls for safeguarding inventory should include security measures to prevent damage and customer or employee theft. Some examples of security measures include the following: 1. Storing inventory in areas that are restricted to only authorized employees. 1
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7-8 1. Locking high-priced inventory in cabinets. 1. Using two-way mirrors, cameras, security tags, and guards. 1
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7-9 A physical inventory or count of inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate. 1
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7-10 Describe the three inventory cost flow assumptions and how they impact the income statement and balance sheet. 2 7-10
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7-11 Inventory Costing Methods 2
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7-12 May 10 Purchase 1 $ 9 18 Purchase 1 13 24 Purchase 1 14 Total 3 $36 Average cost per unit $12 ($36 ÷ 3 units) 2
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7-13 Assume that one unit is sold on May 30 for $20. Depending upon which unit was sold, the gross profit varies from $11 to $6 as shown below: 2
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7-14 Under the specific identification inventory cost flow method , the unit sold is identified with a specific purchase. Not practical unless each inventory unit can be separately identified . . 2
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7-15 Under the first-in, first out (FIFO) inventory cost flow method , the first units purchased are assumed to be sold and the ending inventory is made up of the most recent purchases. 2
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7-16 Under the last-in, first out (LIFO) inventory cost flow method , the last units purchased are assumed to be sold first and the ending inventory is made up of the first units purchased. 2
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7-17 Under the average inventory cost flow method , the cost of the units sold and in ending inventory is an average of the purchase costs.
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