Fin Acct CH6 - Chapter 6 Reporting and Analyzing Inventory...

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Chapter 6 Reporting and Analyzing Inventory o Classifying Inventory Merchandising Company Merchandise inventory Manufacturing Company Raw materials Work in process Finished goods Regardless of the classification, companies report all inventories under Current Assets on the balance sheet o Determining Inventory Quantities Physical Inventory taken for two reasons: Perpetual System o Check accuracy of inventory records o Determine amount of inventory lost (wasted raw materials, shoplifiting, or employee theft) Periodic System o Determine the inventory on hand o Determine the cost of goods sold for the period Determining Ownership of the good FOB Shipping Point FOD Destination Consigned Goods: goods held for sale by one party although ownership of the goods is retained by another party o Inventory Costing: unit costs can be applied to quantities on hand using the following costing methods Cost Flow Assumption does not need to equal physical movements of the goods Specific Identification—an actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total….inventory. (basically the perpetual method, keep track of every single item) Costing Methods First-in, first-out (FIFO) o Earliest goods purchased are first to be sold o Often parallels actual physical flow of merchandise o Generally good business practice to sell oldest units first Last-in, first-out (LIFO) o Latest goods purchased are first to be sold o Seldom coincides with actual physical flow of merchandise o Exceptions include goods stored in piles, such as coal or hay Average-cost o Allocates cost of goods available for sale on the basis of weighted average unit cost incurred
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o Assumes goods are similar in nature Using Cost Flow Methods Consistently Method should be used consistently, enhances comparability Although consistency is preferred, a company may change its inventory costing method Lower-of-cost-or-market: when the value of inventory is lower than its cost Companies can “write down” the inventory to its market value in the period in which the price decline occurs Market Value = Replacement Cost Example of conservatism Fraud and Internal Control Fraud: a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer. o Three factors that contribute to fraudulent activity Opportunity Rationalization Financial pressure The Sarbanes-Oxley Act o Companies must: Develop principles of control over financial reporting Continually verify that controls are working o Independent auditors must attest to the level of internal control o SOX created the Public Company Accounting Oversight Board (PCAOB) Internal Control o Methods and measures adopted to: Safeguard assets Enhance accuracy and reliability of accounting records Increase efficiency of operations
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This note was uploaded on 01/05/2012 for the course ACG 201 taught by Professor Legget during the Fall '08 term at University of North Carolina Wilmington.

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Fin Acct CH6 - Chapter 6 Reporting and Analyzing Inventory...

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