CHAPTER 8 Valuation of Inventories

CHAPTER 8 Valuation of Inventories - 8-1CHAPTER 8Valuation...

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Unformatted text preview: 8-1CHAPTER 8Valuation of Inventories: A Cost Basis Approach8-2LECTURE OUTLINEThis chapter can be covered in three to four class sessions. Students should have hadprevious exposure to inventory accounting topics except for dollar-value LIFO and themodified perpetual system (perpetual records kept in units only).A. Among the most significant assets of many enterprises, inventories are asset itemsheld for sale in the ordinary course of business or goods that will be used orconsumed in the production of goods to be sold.1.For manufacturing firms the inventory amount may be broken down into rawmaterials, work in process, and finished goods.2.Management is vitally interested in inventories in order to prevent stocking upon excessive and unsaleable inventories.B. Inventory Record Systems.TEACHING TIPContrast the accounting procedures under the perpetual and periodic inventorysystems by using Illustration 8-1. This example is based on the exhibit in thetextbook on pages 397.1.Perpetualinventory systemThe costs of purchases and sales are recordeddirectly in the Inventory account (perpetual record kept in units and dollars).2.Modified perpetualinventory systemThe cost of purchases is recordeddirectly in the inventory account. The cost of sales is not recorded at the timeof sale, but a record is kept of the numberof units sold (perpetual record keptin units only).3.Periodicinventory systemThe cost of purchases is recorded in a Purchases(nominal or temporary) account. The balance in the Inventory account remainsunchanged during the period. No record is kept at the time of sale of thenumber or cost of the units sold. At the end of the period the quantity of goodson hand is determined by physical count and the cost of ending inventory isrecorded. Cost of goods sold is determined by adding the beginning inventoryto the purchases and deducting the ending inventory.8-3C. Basic Issues in Inventory Valuation. These include the determination of the (1)items to be included in inventory, (2) the costs to be included in inventory, and (3)the cost flow assumption to be adopted.D. Items to be Included in Inventory. Technically, purchases should be recorded whenlegal titlepasses to the buyer. The following items require careful judgment:1.Goods in Transit:If the goods are shipped f.o.b. shipping point, title passesto the buyer when the seller delivers the goods to the common carrier. If thegoods are shipped f.o.b. destination, title passes when the buyer receives thegoods.2.Consigned Goods:Goods out on consignment remain the property of theconsignor.3.Special Sale Agreementsin which the transfer of legal title may not beaccompanied by a transfer of the risks of ownership. (The concept of revenuerealization can be discussed in connection with these special arrangements.)a.Sales with buyback agreement....
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CHAPTER 8 Valuation of Inventories - 8-1CHAPTER 8Valuation...

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