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Unformatted text preview: 8-18INVENTORIES: COST MEASUREMENT AND FLOW ASSUMPTIONS CHAPTER OBJECTIVESAfter careful study of this chapter, students will be able to: 1. Describe how inventory accounts are classified. 2. Explain the uses of the perpetual and periodic inventory systems. 3. Identify how inventory quantities are determined. 4. Determine the cost of inventory. 5. Compute ending inventory and cost of goods sold under specific identification, FIFO, average cost, and LIFO. 6. Explain the conceptual issues regarding alternative inventory cost flow assumptions. 7. Understand dollar value LIFO. 8. Explain additional LIFO issues. 9. Understand inventory disclosures. 10. Record foreign currency transactions involving inventory (Appendix). 8-2SYNOPSISClassifications of Inventory1. Inventories are the assets of a company which are (1) held for sale in the ordinary course of business, (2) in the process of production for sale, or (3) held for use in the production of goods or services to be made available for sale. A merchandisingcompany needs only one type of inventory account, usually called merchandise inventory. Inventories of a manufacturingconcern normally include raw materials, work in process, and finished goods. 2. Raw materials inventoryincludes the tangible goods acquired by a manufacturing concern for direct use in the production process. Incidental supplies which do not actually become a physical part of the finished product are normally recorded in a separate factory supplies, manufacturing supplies, or indirect materials account. 3. Work (or goods) in process inventoryconsists of the raw materials, direct labor, and manufacturing (factory) overhead costs for those products which are partially completed at the end of a period. Direct labor is the cost of the labor used directly in manufacturing the product. Manufacturing overhead includes variablecosts, such as supplies and some indirect labor, and fixedcosts, such as insurance, utilities, and depreciation on production assets. 4. Finished goods inventoryincludes the completed manufactured products awaiting sale and contains the same cost components as the goods in process inventory. Perpetual and Periodic Inventory Systems5. A perpetualinventory system provides for a continuousrecord of physical quantities in the inventory. Such a system is essential to maintain effective planning and control by management over inventory and to avoid stockouts. A perpetual inventory system may keep track of units only or can be maintained for both costsand units. Comprehensive perpetual systems are increasingly common with the availability of sophisticated computer systems. A company should take a physical count of the ending inventory at least once a year to verify the accuracy of its accounting records. A difference between the physical count and the inventory account balance requires an adjusting entry to bring the perpetual records into agreement with the physical count....
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This note was uploaded on 10/12/2011 for the course AC300 01 taught by Professor Smith during the Spring '11 term at Kaplan University.

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