current-assets-part-ii

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Unformatted text preview: Inventory Costing Methods Current Assets: Part II 6. Inventory Costing Methods Even a casual observer of the stock markets will note that stock values often move significantly on information about a company’s earnings. Now, you may be wondering why a discussion of inventory would begin with this observation. The reason is that inventory measurement bears directly on the determination of income! Recall from earlier chapters this formulation: Please click the advert Notice that the goods available for sale are “allocated” to ending inventory and cost of goods sold. In the graphic, the units of inventory appear as physical units. But, in a company’s accounting records, this flow must be translated into units of money. After all, the balance sheet expresses inventory in money, not units. And, cost of goods sold on the income statement is also expressed in money: We will turn your CV into an opportunity of a lifetime Do you like cars? Would you like to be a part of a successful brand? We will appreciate and reward both your enthusiasm and talent. Send us your CV. You will be surprised where it can take you. Send us your CV on www.employerforlife.com Download free ebooks at bookboon.com 24 Inventory Costing Methods Current Assets: Part II This $1 less of allocating $1 less of available for sale into ending inventory This means that allocating means thatthe total cost of goodsthe total cost of goods available for sale into ending inve will necessarily resultwill necessarily result in cost of goods sold (and vice versa). sold (andas cost of in placing $1 more into placing $1 more into cost of goods Further, vice versa). Further, as goods sold is increased or decreased, there is an decreased, thereon gross profit. effect on gross profit. Remember, sa goods sold is increased or opposite effect is an opposite Remember, sales minus cost of goods sold equals gross profit. Thus, a critical profit. Thus, a critical income is the minus cost of goods sold equals gross factor in determining factor in determining income is t allocation of the cost of goods available forof goods available forinventory and ending goods sold: cost of goods s allocation of the cost sale between ending sale between cost of inventory and 6.1 Determining the Inventory 6.1 Determining the Cost of Ending Cost of Ending Inventory I dollar amount for the dollar was simply given. Not much attention was given In earlier chapters, the n earlier chapters, inventory amount for inventory was simply given. Not much attention was to the specific details to the how thatdetails about how that To delve determined.this delve deeper into this subject, l about specific cost was determined. cost was deeper into To subject, let’s begin by rule: Inventory should include all costs that include all costs begin by considering a general considering a general rule: Inventory shouldare “ordinary andthat are “ordinary and necessary” to put the goods “in place” their resale. necessary” to put the g...
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.

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