Deere & Company and CNH Global N.V. - Inventory.docx -...

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Deere & Company and CNH Global N.V. - Inventory a. Explain the risks and benefits associated with holding inventory. Risks: capital is tied up in physical inventory; inventory becoming obsolete; storage costs; natural disasters; higher insurance premiums Benefits: quicker response time - easily and quickly fill customer orders; decreased risk of shortage - should be able to meet the demand of customers; volume discounts b. Note 15 reveals that the balance sheet inventory amount consists of three types of inventory. What types of costs do you expect to be in the raw materials inventory? In the work-in-process inventory? In the finished goods inventory? Raw materials inventory: Raw materials are materials required to manufacture the final products. The cost includes the cost of materials and freight inward. Raw materials and supplies include the cost of all parts which are currently in stock that have not been issued to the production process. Raw materials and supplies, for the most part, include the cost of all parts that are in stock that have not been set apart for the production process. Direct materials and indirect materials are two subcategories of raw material. Work-in-process inventory: Work in process refers to any raw materials, labor, and overhead cost. It’s an inventory account that includes goods that are in the process of being produced but are yet to be completed as finished output. Finished goods inventory: Finished goods, on the other hand, are goods that have been completed further down the manufacturing process and allow the product to be purchased in a completed form but has yet to be sold to customers. Moreover, finished goods are used to calculate profit. Goods that are not sold get captured on the balance sheet as a debt. At the end of a fiscal year, the discrepancy between goods sold and goods in inventory is calculated c. Why do companies use cost flow assumptions to determine inventory cost? What cost flow assumption(s) does Deere and Company use to determine inventory cost? Companies use cost flow assumptions to determine inventory costs because they usually do not track each individual item of inventory in its AIS as the item is purchased and eventually sold. If the price were completely stable, it would not matter how costs flowed. Deere & Company uses LIFO to determine inventory costs for most of its inventories. Remaining inventories are generally valued at the lower of cost, on the FIFO basis, or market.

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