ch 7 - Chapter 7 Inventory and Cost of Goods Sold (c)...

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1 (c) Mikhail Pevzner and George Mason University Chapter 7 Inventory and Cost of Goods Sold (c) Mikhail Pevzner and George Mason University Inventory • Inventory is tangible property that is – (1) held for resale in the normal course of business Or – (2) used to produce goods or services for sale; (Libby, Libby, Short, 5 th edition page 340) (c) Mikhail Pevzner and George Mason University Inventory: general case • Ending Inventory=Beginning Inventory+Purchases-Cost of Goods Sold (1) • Beginning Inventory+Purchases is some times referred to as Cost of Goods Available for Sale.
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2 (c) Mikhail Pevzner and George Mason University Inventory types • Raw Materials (RM); • Work-in-Process (WIP); • Finished goods (FG); (c) Mikhail Pevzner and George Mason University How are three classes of inventory related in manufacturing environment? Ending RM=Beginning RM+Purchases-Raw Materials Used (2); Ending WIP=Beginning WIP+Raw Materials Used+Direct Labor+Fixed Manufacturing Overhead-Cost of Goods Manufactured (3) ; Ending FG=Beginning FG+Cost of Goods Manufactured-Cost of Goods Sold (4). Note: Equation (4) is just a more specific case of general equation (1) where Cost of Goods Manufactured represents “Purchases”. (c) Mikhail Pevzner and George Mason University Which cost should be included in inventory (capitalized) • GAAP generally requires that all costs incurred to construct an asset and make it ready for sale be included in a cost of that asset (capitalized). Thus, all costs incurred to make inventory ready for use or ready for shipment have to be included in the costs of inventory.
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3 (c) Mikhail Pevzner and George Mason University Who owns inventory in transit? • FOB destination. Title to inventory passes when inventory purchased reaches the buyer’s warehouse and is off-loaded. • FOB shipping point. Title to inventory passes when inventory purchased is off- loaded from the seller’s warehouse. (c) Mikhail Pevzner and George Mason University Assumption about timing of estimation of Cost of Goods Sold • At every sale: perpetual system. • In the end of the period only: periodic system. • In the foregoing example, we will assume periodic system. (c) Mikhail Pevzner and George Mason University Cost of Goods Sold in Periodic System • Under basic inventory equation: Ending Inventory=Beginning Inventory+Purchases- COGS; • Hence, COGS=Beginning Inventory+Purchases- Ending Inventory=Cost of Goods Available for Sale-Ending Inventory; • Hence, Units Sold=Beginning Units+Units Purchased-Ending Units=Units Available for Sale-Ending Units;
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4 (c) Mikhail Pevzner and George Mason University Example MBP has the following purchase and sales patterns: As of 12/31/07, MBP has 20 widgets on hand originally purchased at $10 per widget; 1/1/07: Buys 100 widgets at $10 per widget; 1/31/07: Buys 200 widgets at $11 per widget; 2/15/07: Buys 50 widgets at $9 per widget; 2/28/07: Inventory count shows that 40 widgets are left in the warehouse. Question:
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ch 7 - Chapter 7 Inventory and Cost of Goods Sold (c)...

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