Chapter 6 - Financial Accounting Chapter 6 Notes...

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Chapter 6 Author: Anna Rovira Beavers Needles 2008 8/15/08 1 Financial Accounting Chapter 6 Notes Inventories I. Management Issues Associated with Accounting with Inventory. Defining Inventory: 1. Assets held for resale purpose in a normal course of business. (Current Asset) 2. Assets used to produce products for resale purpose Merchandise Firms: Merchandise Manufacturing Firms: Raw material Work-in-process Finished goods A. Applying the Matching Rule to Inventories The proper determination of income through matching Cost and Revenue Why costing inventory properly is so important? Because gross margin has a direct effect on net income. In Chapter 6 we calculated Gross Margin as follows: Net Sales $250,000 Cost of Good Sold Beginning Merchandise Inventory 50,000 Net Purchases 150,000 Goods Available for Sale 200,000 Less Merchandise Inventory December 31 2002 50,000 Cost of Good Sold 150,000 Gross Margin 100,000 Assuming that the Goods available for sale remain the same, what will be the gross margin if ending inventory had been calculated to be $75,000, what about $25,000? If ending inventory were $75,000, CGS would be less and, and gross margin will higher. If ending inventory were $25,000, CGS will be higher and the gross margin will be lower. Assessing the Impact of Inventory Decisions: Management has various methods to use when evaluating inventory. The decisions usually result in different amounts of reported net income. Because income is affected, the valuation of inventory may also have a considerable effect on the amount of income taxed paid; and thus cash flow.
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Chapter 6 Author: Anna Rovira Beavers Needles 2008 8/15/08 2 C. Evaluating Inventory Level Inventory level that a company may decide to keep may affect the cost of storage, as well as cost of handling. The optimum levels of inventory will impact sales. Low levels when there is high demand will affect total sales. High levels when there is low demand will affect the cash flow of the company as well as adding the additional cost of storage. D. Measuring Optimum Levels of Inventory Turnover Inventory turnover rate: Cost of Good Sold Inventory Turnover Average Inventory $23,374 3.9 times (5,947 + 6,031)/2 This ratio measures how fast inventory is sold. Average Day’s Inventory on hand: Average number of days require to sell the inventory on hand Number of Days in a year Average Days Inv. Inventory Turnover
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Chapter 6 Author: Anna Rovira Beavers Needles 2008 8/15/08 3 $365 93.6 Days 3.9 times In this case this company sales its inventory 3.9 times on an average of 93.6 days. In-Class Exercise SE2 II. Pricing Inventory Under the Periodic Inventory System 1. Costs included in inventory 1. Invoice price less purchase discounts 2. Freight or transportation in, including in insurance 3. Taxes and tariffs Other cost may include storing, ordering and receiving but because the difficulty to closely estimate the amounts are usually considered expenses in the accounting period the inventory was purchase. Merchandise In Transit
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This note was uploaded on 03/10/2011 for the course BUS 1B taught by Professor Kite during the Spring '11 term at Laney College.

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Chapter 6 - Financial Accounting Chapter 6 Notes...

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