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Unformatted text preview: Chapter 07 - Reporting and Interpreting Inventories and Cost of Goods Sold Chapter 7 Reporting and Interpreting Inventories and Cost of Goods Sold ANSWERS TO QUESTIONS 1. Three goals of inventory management are to make or buy products (1) in sufficient quantities to avoid stock-outs (which could result in lost sales revenue and decreases in customer satisfaction), (2) that provide expected levels of quality, (3) at the lowest possible cost by minimizing the costs of obtaining and carrying inventory (purchasing, production, storage, spoilage, theft, obsolescence, and financing). 2. Merchandisers hold merchandise inventory , which usually is acquired in a finished condition and is ready for sale without further processing. Manufacturers often hold three types of inventory, with each representing a different stage in the manufacturing process: (1) Raw materials inventory includes materials that eventually are processed further to produce finished goods. Items are included in raw materials inventory until they enter the production process, at which time they become part of work in process inventory. (2) Work in process inventory includes goods that are in the process of being manufactured, but are not yet complete. When completed, work in process inventory becomes finished goods inventory. (3) Finished goods inventory includes manufactured goods that are complete and ready for sale. At this stage, finished goods are treated just like merchandise inventory. 3. When goods are sold FOB destination, their cost is removed from the inventory account and reported as an expense only when the goods reach their destination. Because the goods were shipped on September 30, they will not reach their destination until October. Consequently, the company should continue to include the cost of the goods in inventory on September 30. 4. Goods available for sale is the sum of the beginning inventory and the amount of goods purchased or made during the period. Cost of goods sold is the cost of goods actually sold, which can be determined by subtracting the cost of ending inventory from the cost of goods available for sale. 7-1 Chapter 07 - Reporting and Interpreting Inventories and Cost of Goods Sold 5. Beginning inventory is the stock of goods on hand (in inventory) at the start of the accounting period. Ending inventory is the stock of goods on hand (in inventory) at the end of the accounting period. The ending inventory of one period automatically becomes the beginning inventory of the next period. 6. (a) Specific identification This inventory costing method requires that each item in the beginning inventory and each item purchased during the period be identified specifically so that its unit cost can be determined by identifying the specific item sold. This method usually requires that each item be marked, often with a code that indicates its cost. When it is sold, that unit cost is the cost of goods sold. To determine the amount to report for ending inventory, the specific items on hand are valued at the actual...
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This note was uploaded on 03/18/2012 for the course ACC 111 taught by Professor Sobeiski during the Spring '12 term at Post.
- Spring '12
- Financial Accounting