Ch06 - 6 Inventories Chapter STUDY OBJECTIVES The Navigator...

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248 Chapter 6 Inventories Scan Study Objectives a Read Feature Story a Read Preview a Read text and answer p. 253 a p. 259 a p. 265 a p. 267 Work Comprehensive p. 269 a Review Summary of Study Objectives a Answer Self-Study Questions a Complete Assignments a After studying this chapter, you should be able to: 1 Describe the steps in determining inventory quantities. 2 Explain the accounting for inventories and apply the inventory cost flow methods. 3 Explain the financial effects of the inventory cost flow assumptions. 4 Explain the lower-of-cost-or-market basis of accounting for inventories. 5 Indicate the effects of inventory errors on the financial statements. 6 Compute and interpret the inventory turnover ratio. The Navigator STUDY OBJECTIVES A The Navigator A DO IT! DO IT! Feature Story “WHERE IS THAT SPARE BULLDOZER BLADE?” Let’s talk inventory—big, bulldozer-size inventory. Caterpillar Inc. ( www.cat.com ) is the world’s largest manufacturer of construction and mining equipment, diesel and natural gas engines, and industrial gas turbines. It sells its products in over 200 countries, making it one of the most successful U.S. exporters. More than 70% of its productive assets are located domestically, and nearly 50% of its sales are foreign. During the 1980s Caterpillar’s profitability suffered, but today it is very suc- cessful. A big part of this turnaround can be attributed to effective manage- ment of its inventory. In 2007 one of Caterpillar’s biggest trucks was selling for $2.5 million. Now imagine what it costs Caterpillar to have too many bulldozers sitting around in inventory—a situation the company definitely wants to avoid. Conversely, Caterpillar must make sure it has enough inven- tory to meet demand. PDF Watermark Remover DEMO : Purchase from www.PDFWatermarkRemover.com to remove the watermark
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249 During a recent 7-year period, Caterpillar’s sales increased by 100%, while its inventory increased by only 50%. To achieve this dramatic reduction in the amount of resources tied up in inventory, while continu- ing to meet customers’ needs, Caterpillar used a two-pronged approach. First, it completed a factory modernization program, which dra- matically increased its production efficiency. The program reduced by 60% the amount of inventory the company processed at any one time. It also reduced by an incredible 75% the time it takes to manufacture a part. Second, Caterpillar dramatically improved its parts distribution system. It ships more than 100,000 items daily from its 23 distribution centers strategi- cally located around the world (10 million square feet of warehouse space— remember, we’re talking bulldozers). The company can virtually guarantee that it can get any part to anywhere in the world within 24 hours. In 2006 Caterpillar had record exports, profits, and revenues. It would seem that things couldn’t be better. But industry analysts, as well as the company’s managers, thought otherwise. In order to maintain Caterpillar’s position as the industry leader, management began another major overhaul of inventory production and inventory management processes. The goal: Within four
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Ch06 - 6 Inventories Chapter STUDY OBJECTIVES The Navigator...

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