ac101_ch5 - Revised July 2008 ACC101 CHAPTER 5 Accounting...

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Revised July 2008 Page 1 of 18 ACC101 – CHAPTER 5 Accounting for Inventories
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Revised July 2008 Page 2 of 18 Key Terms and Concepts to Know Ownership: Ownership includes all inventory owned by the purchaser, regardless of location or possession. The following items are included in inventory: Owned inventory at the company’s location Inventory purchased FOB Shipping Point and still in-transit from the seller Inventory sold FOB Destination and still in-transit to the seller Owned inventory on consignment to others Physical Inventory: Inventory is physically counted to determine the quantity on hand. Inventory Cost: Cost is the total resources given up to acquire inventory and move it to the purchaser’s place of business. Cost may be assigned to units of inventory in one of four ways: Specific identification First-In, First Out (FIFO) Last-In, First-Out (LIFO) Weighted Average Cost The actual application of these methods will vary somewhat depending on whether a perpetual or periodic inventory system is used. Lower of Cost or Market: As with all assets, inventory is recorded at cost when acquired. Over time, however, the cost of replacing the inventory with the same type of inventory (market cost) may fall below purchase cost. This situation requires a journal entry to record the decline in the value of the inventory on hand: Cost of Goods Sold xxx Merchandise Inventory xxx Estimating Inventory Cost: At times, a physical inventory of the merchandise on hand may not be possible or the inventory records may not be available. In these situations, estimates of the value on the inventory on hand and the cost of goods sold are required. The Gross Profit Method and the Retail Method are used for these purposes. Both methods rely on two fundamentals: the relationship among sales, cost of
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Revised July 2008 Page 3 of 18 goods sold and gross profit and the relationship among goods available for sale, ending inventory and cost of goods sold. Inventory Turnover ratio and Days Sales in Inventory ratio
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Revised July 2008 Page 4 of 18 Inventory Cost Flow Assumptions: FIFO, LIFO and Average Cost Table #1 Status # of Units Unit Cost Beginning Inventory 10 $120 Purchased 40 $125 Sold 20 Purchased 50 $130 Sold 20 Sold 30 Purchased 40 $132 Sold 20 1. Each time the units above are sold, how do we know which ones are sold? 2. We must make an assumption as to the order in which the units are sold: a. Under FIFO – units are sold in the order in which they were purchased; first-in, first-out b. Under LIFO – units are sold in reverse order; last-in, first-out c. Under Avg. Cost – we calculate an average cost for all units. 3. Whether the company uses periodic or perpetual inventory procedures is also a factor: a. Under Periodic – all sales transactions are ignored when calculating ending inventory. b.
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ac101_ch5 - Revised July 2008 ACC101 CHAPTER 5 Accounting...

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