Chapter 8 Notes

Chapter 8 Notes - Chapter 8: Valuation of Inventories: A...

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Chapter 8: Valuation of Inventories: A Cost Basis Approach Inventory Issues Classification - Inventories - asset items that accompany holds for sale in the ordinary course of business, or goods that it will use or consume in the production of goods to be sold - Merchandising Concern - a company purchases their merchandise in a form ready for sale o Merchandise Inventory - cost of assigned to unsold units left on hand o Usually only one account, Merchandise Inventory, appears on financial statements - Manufacturing Concerns - produce goods to sell to merchandising firms o 3 inventory accounts: Raw Materials Inventory - cost assigned to goods and materials on hand but not yet placed into production Work in Process Inventory - cost of the raw material for these unfinished goods, plus the direct labor cost applied specifically to this material and a ratable share of manufacturing overhead costs Finished Goods Inventory - costs identified with the completed but unsold units on hand at the end of the fiscal period - Illustration 8-1 - A manufacturing company might also include a Manufacturing or Factory Supplies Inventory account o Include items like machine oils, nails, cleaning material, and any materials used in production but are not primary materials being processed - Illustration 8-2 Inventory Cost Flow - Companies that sell or produce goods report inventory and cost of goods sold at the end of each accounting period - To determine these amounts: o Beginning Inventory + Purchases = Cost of Goods Available for Sale
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o Cost of Goods Available are then assigned to COGS or ending inventory o Illustration 8-3 - Companies use 1 of 2 systems for maintaining accurate inventory: perpetual or periodic - Perpetual System o Perpetual Inventory System - continuously tracks changes in the Inventory account o A company records all purchases and sales (issues) of goods directly in the inventory account as they occur o The accounting features of a perpetual system are: Purchases of merchandise for resale or raw materials for production are debited to inventory rather than to purchases Freight-in is debited to inventory, not purchases. Purchase returns and allowances and purchase discounts are credited to Inventory rather than to separate accounts COGS is recorded at the time of each sale by debiting COGS and crediting Inventory A subsidiary ledger of individual inventory records is maintained as a control measure. The subsidiary records show the quantity and cost of each type of inventory on hand. - Periodic System o Periodic Inventory System - company determines the quantity of inventory on hand only periodically o Records all acquisitions of inventory during the accounting period by debiting the Purchases account o Company then determines the total cost of goods available for sale by: Cost of Goods Available for Sale = Purchases + Beginning Cost of Inventory on Hand COGS = Cost of Goods Available for Sale – Ending Inventory o COGS is a residual amount that depends on a physical count of ending inventory - Comparing Perpetual and Periodic Systems o Illustration 8-4 Page 2 of 15
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This note was uploaded on 02/22/2011 for the course BUAD 362 taught by Professor Frazer during the Spring '10 term at Millersville.

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Chapter 8 Notes - Chapter 8: Valuation of Inventories: A...

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