Chapter 8 Reporting and Interpreting Cost of Sales and Inventory

Chapter 8 Reporting and Interpreting Cost of Sales and Inventory

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Chapter 8: Reporting and Interpreting Cost of Sales and Inventory November 18, 2013 2:24 AM NATURE OF INVENTORY AND COST OF SALES Items Included in Inventory Tangible property that is either: o Held for sale in normal course of business o Used to produce goods/services Inventory = current asset o Normally used or converted into cash within one year or next operating cycle of business (whichever is longer) Merchandisers o Do not manufacture sold products, but purchases them to sell to customers Merchandise Inventory: includes goods held for resale in the ordinary course of business o E.g. Nokia phones sold in telecommunications companies Raw materials inventory: includes items acquired for the purpose of processing into finished goods Work-in-process inventory: includes goods in the process of being manufactured Finished goods inventory: includes manufactured goods that are complete and available for sale Costs Included in Inventory Purchases Inventory -> cost principle (cash equivalent cost, price paid or consideration given to acquire an asset) Inventory costs: sum of applicable expenditures and charges directly or indirectly incurred in bringing an article to a usable or saleable condition and location Company should cease accumulating purchase costs when: o Raw materials are ready for use o Merchandise inventory is ready for shipment to customers Any other costs (salaries, marketing personnel) should be expenses during the period of sale Direct sales (telephone/internet) reduced storage costs and cost of obsolescence Flow of Inventory Costs Merchandisers (wholesalers and retailers) o Merchandise purchased = merchandise inventory account increased o Goods sold = merchandise inventory decreased and cost of sales increased Manufacturing o Raw materials must be purchased o Materials used in production removes cost from raw materials inventory and added to cost of work-in-process inventory o Direct labour + factory overhead costs added to work-in-process inventory when incurred o Direct Labour: earnings of employees who work directly on products being manufactured
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o Factory Overhead: manufacturing costs that are not raw material or direct labour o When finished, work-in-process inventory costs transferred to finished goods inventory o Finished goods sold = cost of sales increased and finished goods inventory decreases Three stages to inventory cost flows 1. Purchasing/production activities (raw materials purchased) 2.
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  • Fall '08
  • KENNEDY
  • Interpreting Cost of Sales and Inventory

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