ACTG 2011 Midterm - Chapter 7 Inventory October-13-10 5:33...

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Inventory is assets held for sale or assets used to produce goods that will be sold as part of the business. Different categories of inventory Raw Materials: inputs into production process - Work-in-progress of WIP inventory: partially completed product to date - Finished goods: inventory that has been completed and ready for sale - IFRS Requires inventory to be valued at costs on the balance sheet Net Realizable Value (NRV) of inventory is less than costs, the inventory must be written down to its NRV. LOWER OF COST and MARKET RULE. Costs of inventory includes all costs incurred to ready the inventory for sale or use: purchase price, import duties, and other taxes, shipping and handling, and any other costs directly related to the purchase of the inventory IFRS requires that the cost of inventory include the cost of materials, labor costs plus an allocation of overhead incurred in the production process. - Overhead is the costs in manufacturing process other than direct labor and direct material. - However, IFRS does not give specific directions for determining which costs and how much of them should be included. - Thus, different entities can determine the cost of inventory differently, which impairs comparability. - For manufacturers and processors: Perpetual and Periodic Inventory Control Systems Perpetual Inventory control system: keeps an ongoing tally of purchases and sales of inventory. Journal Entries: Cr. Accounts Payable/Cash Dr. Inventory To record the purchase of inventory For the purchase of inventory: - Cr. Revenue Dr. Cash To record the sale of inventory For the sale of inventory - Cr. Inventory Dr. Cost of goods sold To record the sale of inventory in a perpetual and the corresponding cost of sales Periodic Inventory control system: WKH LQYHQWRU\ DFFRXQW LVQ¶W DGMXVWHG ZKHQHYHU Chapter 7: Inventory October-13-10 5:33 PM MyNotes Page 1
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Periodic Inventory control system: WKH LQYHQWRU\ DFFRXQW LVQ¶W DGMXVWHG ZKHQHYHU a transaction affects inventory. Purchases are accumulated in a separate purchases account. The balance at the end of year is determined by counting the inventory. Cost of sales = Beginning inventory + Purchases ± Ending Inventory Journal Entries: Cr. Cash/ Accounts Payable Dr. Purchases For the purchase of inventory: - Cr. Revenue Dr. Cash For when inventory is sold - At the end of the period: Dr. cost of sales Cr. Expenses Dr. Inventory (You debit inventory because you convert the remaining amount into an asset at the end of the year) Determine cost of sales using the formula above, followed after is an adjusting entry: Internal Control Under perpetual inventory, an inventory count is done to determine the amount of inventory that maybe stolen, lost, damaged or destroyed. If inventory is not counted at the end of the period, the amount on the b/s can be overstated and expenses would be understated.
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