140 - Accounting in Action INVENTORY If you owned a retail...

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Unformatted text preview: Accounting in Action INVENTORY If you owned a retail store that sells inventory, how would you safeguard your goods? What actions would you take to account for inventory? Decision __—__,,—_..————— How can inventory be protected against loss? How is cost of inventory determined? What is the effect ofith‘eWent costing methods? ; What is the effect of an overstatement of ending ' inventory? it Howr many periods are affected by misstatement? How do I estimate the cost of ending inventory? H» Cl. Guidelines 0 Separate persons with access to inventory from record- keeping of inventory transactions from authorization of transactions ' Restrict access to inventory, leave no one alone with goods, use security systems 0 Physically count inventory regularly and reconcile counts to inventory records 0 Review and analyze inventory data such as inventory turnover rate ' Use perpetual inventory system and documents to evi- dence inventory transactions ' Specific-unit cost: Inventory items are specifically labeled or identified I First-in, first—out (FIFO): The first inventory costs incurred are the first costs to be assigned to cost of goods sold ' Last-in, first-out {LIFO}: The last inventory costs incurred are the first costs to be assigned to cost of goods sold 0 Average cost: After each purchase of inventory, a new weighted average cost per unit is computed When prices are rising: I FIFO reports the highest ending inventory and lowest cost of goods sold O LIFO reports the lowest ending inventory and highest cost of goods sold I Average cost averages the cost of ending inventory items and cost of goods sold If ending inventory is overstated, then I Cost of goods sold is understated 0 Gross profit is overstated 0 Net income is overstated Because ending inventory for one period becomes begin- ning inventory for the next, the inventory, cost of goods said, gross profit, and net income oftwo periods is mis- stared Using the Gross Profit Method Step 1. Calculate cost of goods available for sale Step 2. Estimate cost of goods sold Step 3. Estimate ending inventory inventory 473 ...
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