Chapter 6 Outline[1]

Chapter 6 Outline[1] - Chapter Outline I II Inventory...

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Chapter Outline Notes I. Inventory Basics A. Determining Inventory Items Includes all goods that a company owns and holds for sale. 1. Goods in transit—included if ownership has passed. 2. Goods on consignment—owned by consignor. 3. Goods damaged or obsolete—not included if they cannot be sold. If salable, included at a conservative estimate of their net realizable value (sales price minus cost of making the sale). B. Determining Inventory Costs Includes cost of expenditures necessary, directly or indirectly, in bringing an item to a salable condition and location. 1. Cost example: invoice price minus any discount, plus any incidental costs such as import duties, transportation-in, storage, insurance, etc. 2. Matching principle states that inventory costs should be recorded against revenue in the period when inventory is sold. 3. Exception: Under the materiality principle or the cost-to- benefit constraint (effort outweighs benefit), incidental costs of acquiring inventory maybe deemed immaterial and allocated to cost of goods sold in the period when they are incurred. C. Internal Controls and Taking a Physical Count 1. The Inventory account under a perpetual system is updated for each purchase and sale. 2. Physical count is generally taken at the end of its fiscal year or when inventory amounts are low (at least once per year). 3. Physical inventory is used to adjust the Inventory account balance to the actual inventory on hand and thus account for theft, loss, damage, and errors. 4. Internal controls (such as pre-numbered inventory tickets, assigned primary and secondary counters, and manager confirmations) are applied when a physical count is taken. II. Inventory Costing Under a Perpetual System —Accounting for inventory affects both the balance sheet and the income statement. There are 4 commonly used inventory costing methods. Each assumes a particular pattern of how cost flow through inventory. Physical flow and cost flow need not be the same.
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Chapter Outline Notes (Note: The following assumes a perpetual inventory system. The periodic system is addressed in the appendix 6A outline.) A. Inventory Cost Flow Assumptions Four methods of assigning costs to inventory and cost of goods sold are: 1. Specific identification—when each item in inventory can be identified with a specific purchase and invoice, we can use this method to assign actual cost of units sold to cost of goods sold and leave actual cost of units on hand in the inventory account.
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Chapter 6 Outline[1] - Chapter Outline I II Inventory...

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