Unformatted text preview: es illustrate this important accrual concept:
Entry to set up note receivable:
6-1-X8 Notes Receivable 10,000 Accounts Receivable *** 10,000 To record conversion of an account receivable
to a note receivable Entry to accrue interest at June 30 year end:
6-30-X8 Interest Receivable 100 Interest Income *** 100 To record accrued interest at June 30 ($10,000
X 12% X 30/360 = $100) Entry to record collection of note (including amounts previously accrued at June 30):
8-31-X8 Cash 10,300
Interest Income *** 200 Interest Receivable 100 Notes Receivable 10,000 To record collection of note receivable plus
interest of $300 ($10,000 X 12% X 90/360);
$100 of the total interest had been previously
accrued The following drawing should aid your understanding of these entries: Download free ebooks at bookboon.com
20 Inventory Current Assets: Part II Part 2
Inventory Your goals for this “Inventory” chapter are to learn about: The correct components to include in inventory.
Inventory costing methods, including specific identification, FIFO, LIFO, and weightedaverage techniques.
The perpetual system for valuing inventory.
Lower-of-cost-or-market inventory valuation adjustments.
Two inventory estimation techniques: the gross profit and retail methods.
Inventory management and monitoring methods, including the inventory turnover ratio.
The impact of inventory errors. e Graduate Programme
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Download free ebooks at bookboon.com 21 The Components of Inventory Current Assets: Part II 5. The Components of Inventory
You have already seen that inventory for a merchandising business consists of the goods available
for resale to customers. However, retailers are not the only businesses that maintain inventory.
Manufacturers also have inventories related to the goods they produce. Goods completed and
awaiting sale are termed “finished goods” inventory. A manufacturer may also have “work in
process” inventory consisting of goods being manufactured but not yet completed. And, a third
category of inventory is “raw material,” consisting of goods to be used in the manufacture of
products. Inventories are typically classified as current assets on the balance sheet. A substantial
portion of the managerial accounting chapters of this book deal with issues relating to accounting
for costs of manufactured inventory. For now, we will focus on general principles of inventory
accounting that are applicable to most all enterprises. 5.1 Determining Which Goods to Include in Inventory
Recall from the merchandising chapter the discussion of freight charges. In that chapter, F.O.B.
terms were introduced, and the focus was on which party would bear the cost of freight. But, F.O.B.
terms also determine when goods a...
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