Chapter 6 coursepack F11

Chapter 6 coursepack F11 - Reporting and Analyzing...

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Reporting and Analyzing Inventory Chapter 6
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Inventory Valuation and Cost of Goods Sold How we value inventory will affect: Balance sheet (inventory account) Income statement (cost of goods sold expense) For many companies, inventory asset and COGS expense are large items, so changing their numbers can make a significant difference to working capital, net income and other measures
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Inventory How do we get quantity? inventory counts - even if we use a perpetual system, we must count to ensure the recordkeeping is accurate How do we get unit cost? accumulate purchases costs such as invoiced cost, freight, returns, etc. So, what is the cost of inventory? Total cost = quantity * unit cost
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Complications Regardless of how a company accounts for its inventory flow, all companies MUST perform “periodic” inventory counts A company can count what it has on hand, or what is on its premises - warehouse, stockroom, show room, loading dock
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Complications Companies need to know what they own - just because it is physically on site, does not mean it is owned - just because it is not physically on site, does not mean it is not owned
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Goods in transit Nova Scotia Truck Parts Inc. ships an order to British Columbia Trucking Ltd. BCTL has a December 31 year end. On that day, the parts, worth $230,000 are on a truck in Winnipeg. - is this BCTL’s inventory or NSTPI’s? it depends Depends…. - if the goods were FOB shipping? BC - if the goods were FOB destination? NS
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Consigned Goods In some businesses, goods are held by one party but owned by another - the holder (consignee) does not own the goods - they pay for them once sold - the owner (consignor) keeps title to the goods until they are sold/paid for Businesses report in inventory, items that are owned or controlled. - consigned goods are reported by the consignor as inventory
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Cost per item Up to now our examples have been straightforward. - we’ve either been told the cost of the goods sold, or assumed the costs were consistent (Taffy Turtles example) - What happens if the purchase costs fluctuate? - How do we know the cost per unit? Our entries have focused on total costs for all units.
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Example – Home Depot For example, Home Depot sells thousands of 2” nails in the year. They would purchase them many times over – likely at different costs At the end of the year, Home Depot must have a way of figuring out the cost of the items sold and the cost of the items remaining in stores. The first amount must be matched with revenue on the income statement, and the remainder must be placed on the balance sheet at year end in inventory – How do we do this? By using an inventory cost policy
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Cost Cost of beginning inventory On Hand: Cost of ending inv. Sold:
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Chapter 6 coursepack F11 - Reporting and Analyzing...

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