For example caterpillar classifies earth moving

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For example, Caterpillar classifies earth-moving tractors completed and ready for sale as finished goods . It classifies the tractors on the assembly line in various stages of production as work in process . The steel, glass, tires, and other compo- nents that are on hand waiting to be used in the production of tractors are identi- fied as raw materials . By observing the levels and changes in the levels of these three inventory types, financial statement users can gain insight into management’s production plans . For example, low levels of raw materials and high levels of finished goods suggest that management believes it has enough inventory on hand, and production will be slowing down—perhaps in anticipation of a recession. On the other hand, high lev- els of raw materials and low levels of finished goods probably indicate that man- agement is planning to step up production. 250 H E L P F U L H I N T Regardless of the classi- fication, companies report all inventories under Current Assets on the balance sheet. PDF Watermark Remover DEMO : Purchase from to remove the watermark
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Many companies have significantly lowered inventory levels and costs using just-in-time (JIT) inventory methods. Under a just-in-time method, companies manufacture or purchase goods just in time for use. Dell is famous for having de- veloped a system for making computers in response to individual customer requests. Even though it makes each computer to meet each customer’s particular specifications, Dell is able to assemble the computer and put it on a truck in less than 48 hours. By integrating its information systems with those of its suppliers, Dell reduced its inventories to nearly zero.This is a huge advantage in an industry where products become obsolete nearly overnight. The accounting concepts discussed in this chapter apply to the inventory clas- sifications of both merchandising and manufacturing companies. Our focus here is on merchandise inventory. Determining Inventory Quantities 251 How Wal-Mart Tracks Inventory Wal-Mart improved its inventory control with the introduction of electronic product codes using radio frequency identification (RFID) technology. Much like bar codes, which tell a retailer the number of boxes of a specific product it has, RFID goes a step farther, helping to distinguish one box of a specific product from another. Companies currently use RFID to track shipments from supplier to distribution center to store. Other potential uses include help with monitoring product expiration dates and acting quickly on product recalls. Wal-Mart also anticipates faster returns and warranty processing us- ing RFID. This technology will further assist Wal-Mart managers in their efforts to ensure that their stores have just the right type of inventory, in just the right amount, in just the right place. RFID is expensive: Best Buy , for example, has spent millions researching how to integrate RFID.
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