ACCT 3110 CH 8

ACCT 3110 CH 8 - Accounting 3110 External Financial...

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Unformatted text preview: Accounting 3110: External Financial Reporting I Chapter 8: Inventories: Measurement Inventory Merchandise Inventory Goods acquired for resale Manufacturing Inventory • Raw Materials • Work-in-Process • Finished Goods Goods held for sale in the ordinary Goods held for sale in the ordinary course of business. course of business. Inventory Income Statement Cost of goods sold Balance Sheet Ending inventory shown at lower of cost or market (LCM rule) Important valuation because it Important valuation because it affects both: affects both: Basic Inventory Valuation Problem Beginning Inventory + Cost of Goods Purchased Cost of Goods Available for Sale- Ending Inventory = Cost of Goods Sold Basic Inventory Valuation Problem Ending Inventory (inventory still left on hand) Balance Sheet Cost of Goods Sold (inventory sold during the period) Income Statement Cost of Goods Available for Sale Cost of Goods Available for Sale To Determine Ending Inventory • Quantity : number of items left in ending inventory? • A valuation method: how much are items worth? Inventory Systems Perpetual Inventory System The inventory account is continuously updated as purchases and sales are made. Periodic Inventory System The inventory account is adjusted at the end of an accounting cycle. Two accounting systems are used to record transactions involving inventory: Comparison of Inventory Systems What is Included in Inventory? General Rule All goods owned by the company on the inventory date, regardless of their location. Goods in Transit Goods on Consignment Depends on FOB shipping terms. Expenditures Included in Inventory Invoice Price Freight-in on Purchases + Purchase Returns Purchase Discounts Four Inventory Methods • Specific identification • First-in, first-out (FIFO) • Last-in, first-out (LIFO) • Average cost Specific Identification • Used mainly with expensive items which can be specifically identified in inventory. • Jewelry, cars, heavy equipment. First In First Out (FIFO) • Assumes for cost of goods sold, the cost of the first item acquired should be assigned to the first item sold. • Results in: 1. Ending inventory at most recent inventory prices on the balance sheet. 2. COGS valued at oldest inventory prices on the income statement. • Same ending inventory and COGS with either a perpetual or a periodic inventory system because first-in, first-out order will always be the same. Last In First Out (LIFO) • Assumes for cost of goods sold, the cost of the last layer of items purchased should be assigned to the first item sold....
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ACCT 3110 CH 8 - Accounting 3110 External Financial...

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