AFM291-ch08

AFM291-ch08 - Inventory Chapter 8 AFM 291 chapter 8 1...

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AFM 291 chapter 8 1     Chapter 8                                               Inventory Inventory
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AFM 291 chapter 8 2 Inventory Definition of Inventory: Inventories are “assets: (a)held for sale in the ordinary course of business; (b)in the process of production for such sale; or (c)in the form of materials or supplies to be consumed in the production process or in the rendering of services.”
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AFM 291 chapter 8 3 Inventory Cost Flows Merchandising Operations Cost of goods sold $$$ Merchandise Inventory Purchases COGS
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AFM 291 chapter 8 4 Hudson’s Bay   Company
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AFM 291 chapter 8 5 Inventory Cost Flows Work in Process Inventory $$$ COGM Manufacturing Operations Finished Goods $$$ Raw Materials Labour Mfg. Overhead COGS COGS $$$
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AFM 291 chapter 8 6 Ballard Power Systems, Inc.
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AFM 291 chapter 8 7 Ballard Power Systems, Inc.
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AFM 291 chapter 8 8 Perpetual System Purchases and sales of inventory recorded directly to Inventory account Inventory purchases, freight-in, purchase returns and discounts are debited/credited to the Inventory account Cost of Goods Sold (COGS) is debited and Inventory is credited for each sale Periodic inventory counts still required to ensure reliability Any differences in counted and recorded quantities are posted to a separate account – Inventory Over and Short (recorded as an adjustment to COGS or with “Other Gains and Losses”)
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AFM 291 chapter 8 9 Periodic System Inventory purchases recorded as a debit to Purchases account The quantity and cost of inventory on hand is determined by taking a physical inventory count (and occasionally counted periodically throughout fiscal year) Cost of Goods Sold is determined at the end of the period COGS = Beginning inventory + Purchases - Ending inventory Cannot compare inventory balance (beginning inventory) to physical count (ending inventory) Freight, purchase returns and allowances, and purchase discounts are recorded in separate accounts
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AFM 291 chapter 8 10 Basic Valuation Issues Most inventory is valued using a cost-based system at “lower of cost and net realizable value” Specialized inventory (e.g. biological assets, including plants and animals) may use a “net realizable value” model (or “fair value less cost to sell”) Under the typical cost-based system, ending inventory valuation requires answers to each of the following: 1. Which physical goods should be included as part of inventory? 2. What costs should be included as part of inventory cost? 3. What cost formula should be adopted? 4. Has there been an impairment in value of inventory items held?
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AFM 291 chapter 8 11 1. Items to Be Included in Inventory Legal title to goods generally determines items to be included in inventory Must determine when risks and rewards of ownership transfers 1. Goods in transit (include in seller’s inventory if seller has title during shipment – f.o.b. destination; include in buyer’s inventory if buyer has title during shipment – f.o.b. shipping point)
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AFM291-ch08 - Inventory Chapter 8 AFM 291 chapter 8 1...

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