pn_chap06

pn_chap06 - Chapter 6 Inventories and Cost of Goods Sold...

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Harcourt, Inc. 6-1 Chapter 6 Inventories and Cost of Goods Sold Key Concepts: n Why should every manager be informed and concerned about inventory? n Are the inventory figures on all companies' balance sheets calculated the same way? n How does a company select its inventory costing method? n How does inventory affect cash flow?
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FINANCIAL ACCOUNTING INSTRUCTOR’S MANUAL 6-2 Harcourt, Inc. Chapter Outline LO 1 The Nature of Inventory Inventory is an asset held for resale rather than use, and takes different forms: n Retailer has single inventory, merchandise inventory (Exhibit 6-1) cost is purchase price n Manufacturer has more than one form of inventory, depending on stage of development (Exhibit 6-1) raw materials : purchased items that have not yet entered the manufacturing process work in process : unfinished units of the company's product direct materials: used to make product direct labor: paid to workers who make the product from raw materials manufacturing overhead: manufacturing costs that cannot be directly traced to a specific unit of product finished goods : product ready for sale LO 2 Inventory Valuation and the Measurement of Income Inventory—an asset (unexpired cost) —becomes cost of goods sold—an expense ( expired cost) : Beginning inventory + Purchases = Goods available for sale Ending inventory = Cost of goods sold Error in end inventory figure will give incorrect cost of goods sold, and thus incorrect income. Cost of inventory includes all costs incurred in bringing the inventory to its existing condition and location n Purchase price less discounts n Transportation in n Insurance in transit n Taxes n Storage n Apply cost/benefit test to determine which items to add to cost LO 3 Inventory Costing Methods with a Periodic System Inventory is purchased at different times, and at different prices; these costs must be allocated correctly when items are sold. n Specific identification: find out exactly which item(s) were sold; their actual cost is cost of goods sold only correct method in terms of physical flow impractical for most retail merchandise n Accountants make assumptions about flow of costs rather than flow of units specific identification matches flow of costs to flow of units may be difficult to keep track of individual units (what if they're nails? ping- pong balls? cans of peas?)
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CHAPTER 6 — INVENTORIES AND COST OF GOODS SOLD Harcourt, Inc. 6 - 3 can lead to income manipulation: sell selected items (depending on their purchase price) to increase or decrease income weighted average : unit cost = cost of goods available for sale ÷ units available for sale results in smoothing of income FIFO , or First In, First Out method: assumes that the costs of the first items received (in most cases the beginning inventory) are the first used to cost goods sold, working forward in time through the purchased goods; ending inventory is costed at the most recently paid prices, working backward in time
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pn_chap06 - Chapter 6 Inventories and Cost of Goods Sold...

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