accting 301 ch6 min shen

accting 301 ch6 min shen - CH 6-Inventory & Cost of...

Info iconThis preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
1 CH 6-Inventory & Cost of Good Sold Inventory : Assets held for resale or for use in the production of goods for sale Merchandise Inventory —goods purchased for resale Manufactured for sale - Raw Materials Inventory (RMI): acquired to use in the production - Work in Process Inventory (WIP): goods in the process of being manufactured but not yet completed - Finished Goods Inventory (FG): goods completed and ready for sale Inventory cost – include all costs incurred (ordinary and necessary) to get inventory in usable or salable condition ( cost principle ). Usually it includes invoice price, tax, shipping cost (freight- in), insurance expense and inspection costs. Freight-in (transportation-in) paid by the purchaser is included in inventory cost. Shipping charges on outgoing goods (fright-out or transportation-out) are reported as a selling expense, not as part of inventory cost. Purchase returns and allowances represent reductions in net purchases. Purchase discounts represent reductions in the amount to be paid if payment is made within discount period. The seller grants purchase discount to encourage early payment and minimize bad debts. Example: On May 10, We Fix It Company received merchandise for resale from its supplier. The invoice price was $2,500 with terms of 2/10, n/30 for 100 units of Part #107N. The invoice was paid on May 17. Freight costs were $80 and the company paid $56 of interest on a loan to buy the inventory. What is the unit cost that should be recorded for each of the 100 units of Part # 107N?
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 Example: Matrix, Inc. purchased on account $6,000 of merchandise for resale to customers on 3/10/2010. The merchandise was purchased subject to a cash discount of 2/10, n/30. The company incurred $160 in freight-in on the merchandise. Upon inspection, the company found that $200 of merchandise was damaged and the seller agreed to accept the merchandise return and credit the account of the company on 3/15/2010. Lower of cost or market (LCM) – GAAP requires that inventories be carried at cost or current market value, whichever is lower. In conformity with the cost principle, inventories should be measured at their purchase cost. But if there is a permanent decline in the market value of the inventories (damaged, obsolete, etc), we need to write the inventory down. Example: Item Historical Cost Designated Market Value Final Inventory Cost A $88,000 $80,000 B $88,000 $90,000 Cost, physical flow related to goods: Merchandise is purchased Merchandise is held for sale Merchandise is sold Ending inventory on the balance sheet Cost of goods sold on income statement Inventory Cost of good sold
Background image of page 2
3 Cost of goods sold (COGS) = Number of units sold times assigned unit cost KEY: Matching principle (COGS recorded as an expense in the period when the unit is sold)
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

This note was uploaded on 02/16/2011 for the course ACCOUNTING 301 taught by Professor Chen during the Spring '10 term at George Mason.

Page1 / 10

accting 301 ch6 min shen - CH 6-Inventory & Cost of...

This preview shows document pages 1 - 4. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online