11_Chapter_8_Lecture

Intermediate Accounting

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LECTURE Dear Students, I think you all have had previous exposure to inventory accounting topics except for dollar-value LIFO and the modified perpetual system (perpetual records kept in units only). A. Among the most significant assets of many enterprises, inventories are asset items held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. 1. For manufacturing firms the inventory amount may be broken down into raw materials, work in process, and finished goods. 2. Management is vitally interested in inventories in order to prevent stocking up on excessive and unsaleable inventories. B. Inventory Record Systems. Contrast the accounting procedures under the perpetual and periodic inventory systems by using Illustration 8-1 . This example is based on Illustration 8-3 i n the textbook on page 371. 1. Perpetual inventory system—The costs of purchases and sales are recorded directly in the Inventory account (perpetual record kept in units and dollars). 2. Modified perpetual inventory system—The cost of purchases is recorded directly in the inventory account. The cost of sales is not recorded at the time of sale, but a record is kept of the number of units sold (perpetual record kept in units only). 3. Periodic inventory system—The cost of purchases is recorded in a Purchases (nominal or temporary) account. The balance in the Inventory account remains unchanged during the period. No record is kept at the time of sale of the number or cost of the units sold. At the end of the period, the quantity of goods on hand is determined by physical count and the cost of ending inventory is recorded. Cost of goods sold is determined by adding the beginning inventory to the purchases and deducting the ending inventory. C. Basic Issues in Inventory Valuation. These include the determination of the (1) items to be included in inventory, (2) the costs to be included in inventory, and (3) the cost flow assumption to be adopted.
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D. Items to be Included in Inventory. Technically, purchases should be recorded when legal title passes to the buyer. The following items require careful judgment: 1. Goods in Transit: If the goods are shipped f.o.b. shipping point , title passes to the buyer when the seller delivers the goods to the common carrier. If the goods are shipped f.o.b. destination , title passes when the buyer receives the goods. 2. Consigned Goods: Goods out on consignment remain the property of the consignor. 3. Special Sale Agreements in which the transfer of legal title may not be accompanied by a transfer of the risks of ownership. (The concept of revenue realization can be discussed in connection with these special arrangements.)
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a. Sales with buyback agreement . (1)
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11_Chapter_8_Lecture - LECTURE Dear Students, I think you...

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