chapter 6

chapter 6 - Objectives: Chapter 6 Accounting for...

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1 Chapter 6 Accounting for Inventories Professor Dominica Lee September 2005 2 ACY1111 D. Lee 2005-2006 Objectives: 1. Inventory costing methods: a. Specific unit cost (or specific identification) method b. Weighted-average cost c. First-in, first-out (FIFO) d. Last-in, first-out (LIFO) 2. Effects of inventory errors 3. Estimating inventory 4. More accounting principles (Chapter 7) 3 ACY1111 D. Lee 2005-2006 Inventory: Are (1) merchandise held for sale in the normal course of business and (2) materials in the process of production or held for production. 4 ACY1111 D. Lee 2005-2006 Determining Actual Quantity of Inventories: 1. taking a physical inventory of goods on hand and 2. include all the goods owned ( i.e. holding the legal title) by the business on the inventory date. 5 ACY1111 D. Lee 2005-2006 Who has the legal title to the goods? Goods in Transit: should be included in the inventory of the party that has legal title to the goods. FOB shipping point : legal title passes to the buyer when the public carrier accepts the goods from the seller. FOB destination: legal title to the goods remains with the seller until the goods reach the buyer. Goods on consignment : goods belong to the consignor, even though the goods are in the hands of the retailer (consignee). 6 ACY1111 D. Lee 2005-2006 Inventory Cost: Includes all costs incurred in buying the goods and to make them ready for sale. E.g. transportation costs (freight-in), insurance on goods while in transit, import duties etc. What about advertising costs, sales commissions? Inventory (B/S) = no. of units of inventory on hand x Cost per unit of inventory Cost of Goods Sold =No. of units of inventory sold x cost per unit of inventory CGS = Beg inv. + purchases – Ending inventory
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2 7 ACY1111 D. Lee 2005-2006 Inventory Costing Methods: Can use different methods for different categories of inventory. The physical movement of the goods does not have to be the same as the cost flow of the goods. 8 ACY1111 D. Lee 2005-2006 Inventory Costing Methods (Cont’d) 1. Specific identification method: Assumes that each inventory item is identified. It reports ending inventory at actual cost and
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This note was uploaded on 11/26/2010 for the course BA ACY1111/2 taught by Professor C during the Spring '09 term at CUHK.

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chapter 6 - Objectives: Chapter 6 Accounting for...

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