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Chapter 8 - Inventory Classification and Control...

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Inventory Classification and Control : Classification: Inventories are asset items that a company holds for sale in the ordinary course of business or goods that it will use or consume in the production of goods to be sold. (investment in inventories freq the largest CA of merchandising and manuf businesses) merchandising concern such as Wal Mart purchases in form ready for sale. Reports cost assigned to unsold units as merchandise inventory and it is only Inventory account. Manufacturing concerns produce goods to sell to merchand firms. Has three inventory accounts, raw materials, work in process, finished goods . raw materials includes costs assigned to goods on hand but not yet in production. Includes wood for baseball bat or steel for car. Work in process includes cost of raw material for unfinished units, plus direct labor and some manufact overhead. Finished goods cost of completed but unsold units on hand at end of fiscal period. (sometimes a manufac comp may include a supplies inventory accnt which includes supplies that are used in production but are not the primary materials being processed) Control : company may lose sales and customers if it does not stock products in desired, style, quantity, and quality. Must use one of two systems – perpetual and periodic . Perpetual System : continuously tracks changes in the inventory account all purchases and sales recorded as they occur . Features : 1) purchases of merch for resale or raw mater for prod are debited to inventory not purchases, 2) freight in, purch returns and allow, and purch disc are debited to inventory not separate accnts, 3) COGS recorded at time of each sale by debiting COGS and crediting Inv, 4) subsidiary ledger of indiv inv records maintained as control measure. Shows quantity and cost of each type of inv on hand (provides continuous record of balances in inv and COGS accnts) Periodic System : company determines quantity of inventory on hand only periodically. Records acquisitions of inventory during the accntg period by debiting purchases accnt.company then adds total in purchase account to cost of inv on hand at beg of pd. Sum is the total COG avail for sale. COGS found by subtr ending inventory (once a year, companies take physical inv count) some comp use modified perpetual inventory system that provides inv records of + and – in quantities only, not $ (if possible, companies should do physical count towards end of fiscal yr to report accurate numbers)….***Differences in perpetual inv balance and physical inventory count are adjusted with following entry: Debit to Inventory Over and Short and Credit to Inventory. Periodic method doesn’t have records to compare to physical count and overages and shortages buried in COGS.
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