Chapter 6_Lecture_Summer_2010

Chapter 6_Lecture_Summer_2010 - Chapter 6 Study Objectives...

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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. Chapter 6 Study Objectives Chapter 6 Study Objectives
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Classifying Inventory Classifying Inventory One Classification: Merchandise Inventory Three Classifications: Raw Materials Work in Process Finished Goods Merchandising Company Manufacturing Company Regardless of the classification, companies report all inventories under Current Assets on the balance sheet.
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MERCHANDISE INVENTORY CHARACTERISTICS MERCHANDISE INVENTORY CHARACTERISTICS Merchandise inventory has two common characteristics: 1. it is owned by the company and 1. it is in a form ready for sale to customers in the ordinary course of business
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CLASSIFYING CLASSIFYING INVENTORY IN A MANUFACTURING INVENTORY IN A MANUFACTURING ENVIRONMENT ENVIRONMENT Unlike merchandise inventory, manufacturing inventory may not yet be ready for sale. Finished goods , inventory which is completed and ready for sale. Work in process , inventory in various stages of Production and not yet completed. Raw materials , components on hand waiting to be used in production.
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There are two systems for keeping inventory records: Perpetual System (Chapter 5) Inventory records are continuously updated to reflect each purchase and sale of inventory. COGS is recorded at time of sale. Periodic System (Appendix 5-A) COGS is recorded at the end of the period when a physical count of inventory is taken and inventory records are adjusted. Determining Inventory Quantities Determining Inventory Quantities
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The primary basis of accounting for inventories is cost as required by the cost principle . Under the matching principle , the major objective in accounting for inventories is the matching of appropriate costs with sales revenues. These two principles guide the decisions about determining and allocating inventoriable costs . Inventoriable Costs Inventoriable Costs
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Inventoriable costs include all expenditures needed to acquire the goods and make them ready for sale. Inventoriable costs include the invoice price plus freight-in less purchase discounts and purchase returns and allowances. Inventoriable costs may be regarded as a pool of costs that consist of two elements: Cost of the beginning inventory and Cost of the goods purchased during the year. The sum of these elements equals the cost of goods available for sale . Determining Inventoriable Costs
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This note was uploaded on 02/08/2011 for the course ACCOUNTING 272 taught by Professor Stein during the Spring '11 term at Rutgers.

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Chapter 6_Lecture_Summer_2010 - Chapter 6 Study Objectives...

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