Chapter_8_Lecture_Notes_4th_edition_Libby_Student_Version

Chapter_8_Lecture_Notes_4th_edition_Libby_Student_Version -...

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Chapter 8 12/29/11 1 Reporting and Interpreting Cost of Sales and Inventory
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Learning Objectives 1. Identify what should be included in cost of inventory 2. Highlight the differences between periodic and perpetual inventory systems- a review 3. Understand the 3 different inventory costing methods 4. Analyze the effects of inventory errors 5. Report inventory using the lower of cost of market Interpret inventory turnover ratio and the effects on cash flow. 12/29/11 2 After studying this chapter, you should be able to:
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Users Perspective: Importance of Inventories Inventory: the largest current asset (and total assets) of manufacturing and retail firms Considered “high-risk” assets -lots of internal control issues Cost of Goods Sold : the largest single expense category on the I/S Watch out for accounting policies used in this area--cause income and net assets to change materially Need to look at: Items and costs to include in inventory Cost flow assumptions Lower of Cost or Market- Valuation 12/29/11 3
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4 Earnings Process Measurement for Merchandiser Illustration 5-1 12/29/11
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Relationship between Inventory and Cost of Goods Sold- Periodic Inventory System 12/29/11 5 Beginning Inventory Beginning Inventory Purchases for the Period Purchases for the Period Ending Inventory (Balance Sheet) Ending Inventory (Balance Sheet) Goods Available for Sale Goods Available for Sale Cost of Goods Sold (Income Statement) Cost of Goods Sold (Income Statement)
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12/29/11 6 Merchandise Purchases Merchandise Purchases Cost of Goods Sold Cost of Goods Sold Merchandise Inventory Merchandise Inventory Raw Materials Raw Materials Direct Labour Direct Labour Factory Overhead Factory Overhead Raw Materials Inventory Raw Materials Inventory Work in Process Inventory Work in Process Inventory Finished Goods Inventory Finished Goods Inventory Cost of Goods Sold Cost of Goods Sold Merchandiser Manufacturer
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Transportation Costs- Determines Ownership FOB Destination Seller pays for transportation Sale transfer rights upon arrival of the buyer’s business Transportation costs is included as selling expense FOB Factory or shipping point Buyers pay the freight cost- recorded as “Transportation In” Cost of goods purchased should include transportation costs Sale transfers ownership rights when the goods leave the seller’s place of business 12/29/11 7
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12/29/11 8 Provides up-to-date inventory records Provides up-to-date inventory records Provides up-to-date records for cost of goods sold Provides up-to-date records for cost of goods sold Perpetual System Perpetual System Eg: auto dealers, large appliance dealers, grocery stores using laser scanner Useful for high values not excessive inventory levels Requires detailed accounting records- more costly to implement Computer technology made this method popular Physical count done at least once a year •Results in higher cost of tracking •Identifies inventory shrinkage, Losses due to theft, damage, or spoilage
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This note was uploaded on 12/29/2011 for the course MANAGEMENT MGTB05 taught by Professor Georgequanfun during the Fall '11 term at University of Toronto- Toronto.

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Chapter_8_Lecture_Notes_4th_edition_Libby_Student_Version -...

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