AFM 101 Chapter 8 notes - AFM 101 Chapter 8 notes Nature of...

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AFM 101 Chapter 8 notes Nature of inventory and cost of sales Items included in inventory Inventory is tangible property held for sale in the normal course of business or used in producing goods or services for sale Merchandise Inventory includes goods held for resale in the ordinary course of business - Current asset on statement of financial position because it is converted to cash within a year - A manufacturer is a company that does not produce but only resells goods (retailer or wholesaler) Raw material inventory includes items acquired for the purpose of processing into finished goods such as natural resources or food. Work-in-process inventory are goods in the process of being manufactured Finished goods inventory are manufacture red goods that are complete and available for sale - The above 3 apply for manufacturing business but not a merchandise business Cost included in inventory purchases Inventory is recorded according to the cost principle Inventory costs include all expenditures related to the purchase such as import duties (tariffs) and FOB shipping/ destination. Flow of inventory costs (Diagram on pg 409 really helps) In a manufacturing environment the inventory is not simply an increase or decrease to MI Direct labour refers to the earnings of employees who work directly on the products being manufactured Factory overhead is comprised of manufacturing costs that are not direct labour or raw materials, such as cost of utilities, and security - These two are both part of work in process inventory Nature of Cost of Sales Cost of Sales is basically cost of goods sold, which is number sold x cost of each good. Cost of goods available for sale is BI + Purchases Cost of sales equation : BI + P –EI = COGS - Each element of this equation is on the t account for merchandise inventory Control of inventory Internal control of inventory After cash, inventory is the second most vulnerable to theft Ways to safeguard it: 1. Separation of responsibilities for inventory accounting and physical handling of inventory 2. Storage of inventory in a manner that protects it from theft and damage 3. Limiting access to inventory to authorized employees 4. Maintaining perpetual records 5. Comparing perpetual to periodic physical counts in inventory Perpetual and periodic inventory systems Two methods to determine cost of sales and ending inventory Perpetual inventory system is a detailed inventory record is maintained by recording each purchase and sale during an accounting period
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- Shows beginning inventory and updates it by recording transactions regarding purchases
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  • Fall '08
  • KENNEDY
  • COGS

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