needles_chapteroutline_ch06 - CHAPTER 6 Inventories...

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CHAPTER 6 Inventories 0REVIEWING THE CHAPTER Objective 1: Explain the management decisions related to inventory accounting, evaluation of inventory level, and the effects of inventory misstatements on income measurement. 10. Inventory is considered a current asset because it normally is sold within one year or the operating cycle (whichever is longer). The inventory of a merchandising company consists of only completed goods that it owns and holds for sale in the regular course of business. The inventory of a manufacturer, on the other hand, consists of raw materials, work in process, and finished goods. The costs of work in process and finished goods inventories include the costs of raw material, labor, and overhead (indirect manufacturing costs) incurred in producing the finished product. 20. The objective of accounting for inventory is the proper determination of income through the matching of costs and revenues, not the determination of the most realistic inventory value. Thus, in accounting for inventory, the following two questions must be answered:0 a0. How much of the asset has been used up (expired) during the current period and should be transferred to expense? b0. How much of the asset is unused (unexpired) and should remain on the balance sheet as an asset? 30. A company has a number of choices with regard to inventory systems and methods. Because these systems and methods usually produce different amounts of reported net income, the choices that a company makes affect external evaluations of the company, as well as such internal evaluations as performance reviews. In addition, because income is affected, the valuation of inventory can have a considerable effect on the amount of income taxes paid, which will in turn affect cash flows. 40. Once a company has chosen the systems and methods it will use for its inventory, the consistency convention allows a change to be made only when it can be justified by management. When a justifiable change is made, the full disclosure convention requires the notes to the financial statements to contain a description of the change, as well as its effects. 50. It is important for a merchandiser to maintain a sufficient level of inventory to satisfy customer demand. However, the higher the level maintained, the more costly it is for the business to handle and store its goods. Management can evaluate the level of inventory by calculating and analyzing its inventory turnover and days’ inventory on hand.0 a0. Inventory turnover indicates the number of times a company’s average inventory is sold during an accounting period. It equals cost of goods sold divided by average inventory. b0. Days’ inventory on hand indicates the average number of days required to sell the inventory on hand. It equals 365 divided by the inventory turnover.
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60. To reduce their levels of inventory, many companies use supply-chain management in conjunction with a just-in-time operating environment. With supply-chain management,
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needles_chapteroutline_ch06 - CHAPTER 6 Inventories...

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