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Unformatted text preview: 9 Inventory and Cost of Goods Sold Overview Chapter 9 is quite long and covers a number of issues involving both inventory and cost of goods sold. Hopefully, you learned something about inventory methods in your introductory accounting courses so that this isn’t all new for you. Regardless, there is a lot to take in in this chapter, so you may need to spend more time studying it than you do the rest of the chapters in this book. Manufacturing businesses have multiple kinds of inventory to account for. They purchase raw materials, have inventory at various stages of completion, and have finished goods ready to ship or turn over to customers. Manufacturing companies also have additional kinds of inventorial costs. Salaries of factory workers and other overhead costs go into inventory (and eventually cost of goods sold). Businesses usually begin an accounting period with inventory and then make additional purchases during the period. These two items together equal the cost of goods available for sale to customers during a period. There are a variety of possible methods under GAAP with which a company can allocate these costs between cost of goods sold and ending inventory. First-in, first-out (FIFO) is the most popular method, but other methods include last-in, first-out (LIFO), specific identification, and average cost. Although inventories are generally shown on the balance sheet at their historical cost, GAAP requires them to be written down to “market” if that is a lesser amount. Computing what exactly “market” is can be more complicated than it looks on the surface. Businesses then can choose to write inventory down to market on an item-by- item basis, by major classes of inventory, or the inventory as a whole. The chapter also discusses some inventory estimation techniques, which are less precise but still permissible in some circumstances. These include the gross profit method, dollar-value LIFO methods, and retail inventory methods. 9-2 Chapter 9 Learning Objectives Refer to the Review of Learning Objectives at the end of the chapter. It is crucial that this section of the chapter is second nature to you before you attempt the homework, a quiz, or exam. This important piece of the chapter serves as your CliffsNotes or “cheat sheet” to the basic concepts and principles that must be mastered. If after reading this section of the chapter you still don’t feel comfortable with all of the Learning Objectives covered, you will need to spend additional time and effort reviewing those concepts that you are struggling with. The following “Tips, Hints, and Things to Remember” are organized according to the Learning Objectives (LOs) in the chapter and should be gone over after reading each of the LOs in the textbook....
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- Fall '08