LN_inventories -Ch 8 and 9

LN_inventories-Ch - Ch 8 and Ch 9 Inventories ACCT 401 SP 11 Part I Inventory Measurement and Reporting(Ch 8 1 Inventory classification 1

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Ch 8 and Ch 9: Inventories ACCT 401, SP 11 Part I: Inventory Measurement and Reporting (Ch 8) 1. Inventory classification 1) Merchandise inventory: goods acquired for sale 2) Manufacturing inventory: A) Raw materials: assets eventually to produce goods but not yet in production. B) Work-in-process: assets in production for future sale. C) Finished goods: assets ready for sale 2. A DIAGRAM of the inventory cost flow : 3. Inventory systems used to record inventory transactions:
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Ch 8 and Ch 9: Inventories ACCT 401, SP 11 1) Two systems: A) Perpetual Inventory System : the inventory accounts continuously updated as purchases and sales are made. B) Periodic Inventory System : the inventory accounts adjusted at the end of the accounting cycle. 2) Comparison of Inventory Systems In reality, whether the company uses a periodic or a perpetual inventory system to record transactions, a company must do a year-end physical inventory count to figure out how many units are on hand! In summary, the main difference between the two methods is that the periodic allocates cost of goods available for sale between ending inventory and cost of goods sold at the end of the year, whereas the perpetual performs this allocation after every sale. 3) Example 1: Liberal Inc. begins 2011 with $120 in inventory. During the period it purchases on account $600 of merchandise for resale to customers. During 2011, Liberal sold, on account, inventory with a retail price of $820 and a cost basis of $540
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Ch 8 and Ch 9: Inventories ACCT 401, SP 11 to customers. A physical count of ending Inventory shows a balance of $180 (dollar amount in thousands). Required: Prepare all necessary journal entries. A) Use a perpetual system: B) Use a periodic system: 4. Determining quantities to be included in inventory – there are three items that make quantity determination difficult:
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Ch 8 and Ch 9: Inventories ACCT 401, SP 11 1) Goods in transit – inventory cut-off issue 2) Goods on consignment – consignment exists when a company arranges for a third party to sell its goods. 3) Sales returns – 5. Inventory Cost Flow Assumptions: 1) Four cash flow assumptions A) Specific Identification – B) Average Cost – C) First-In-First-Out (FIFO) – D) Last-In-First-Out (LIFO) – 2) Examples: A) EXAMPLE 2: ACTUAL INVENTORY COST DETERMINATION
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Ch 8 and Ch 9: Inventories ACCT 401, SP 11 Number of Companies Methods 2007 2006 2005 2004 FIFO 391 385 385 386 LIFO 213 228 229 239 Average Cost 155 159 155 169 Other 24 30 30 27 Use of LIFO All inventories 14 11 16 20 50% or more of inventories 91 109 113 108 Less than 50% of inventories 88 88 76 85 Not determinable 20 20 24 26 Companies using LIFO 213 228 229 239 Source: Accounting Trends & Techniques (AICPA 2008)
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ACCT 401, SP 11 B) EXAMPLE 3: COST FLOW EXERCISE Shown below is activity for one of the products of Illinois Office Equipment: Required: Compute the ending inventory and cost of goods sold assuming Illinois uses LIFO and a periodic inventory system. Required:
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This note was uploaded on 02/22/2012 for the course ACCT 401 taught by Professor Winchel during the Spring '10 term at South Carolina.

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LN_inventories-Ch - Ch 8 and Ch 9 Inventories ACCT 401 SP 11 Part I Inventory Measurement and Reporting(Ch 8 1 Inventory classification 1

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