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Ch 8 inventory
Terms in this set (30)
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
merchandise in a form ready for sale
manufacturers normally have three inventory accounts—Raw Materials,
Work in Process, and Finished Goods
raw materials inventory
reports the cost assigned to goods and materials on hand but not yet
placed into production as raw materials inventory
work in process inventory
The cost of the raw material for these unfinished units, plus the direct labor cost
applied specifically to this material and a ratable share of manufacturing overhead
costs, constitute the work in process inventory
might include a Manufacturing or Factory Supplies Inventory account for supplies that are used in production
finished goods inventory
report the costs identified with the completed but unsold units on hand at the end of the fiscal period as finished goods inventory
Inventory Cost Flow
Companies that sell or produce goods report inventory and cost of goods sold at
the end of each accounting period
two types of systems
Companies use one of two types of systems for maintaining accurate inventory
records for these costs—the perpetual system or the periodic system.
perpetual inventory system
continuously tracks changes in the Inventory account.
That is, a company records all purchases and sales (issues) of goods directly in the Inventory account as they occur
The perpetual inventory system provides a continuous record of the balances in both the Inventory account and the Cost of Goods Sold account.
periodic inventory system
a company determines the quantity of inventory
on hand only periodically, as the name implies. It records all acquisitions of inventory
during the accounting period by debiting the Purchases account
Inventory Over and Short
When a company uses a perpetual inventory system and a difference exists between the perpetual inventory balance and the physical inventory count, it needs a separate eentry to adjust the perpetual inventory account
physical inventory short
Debit to inventory over short
Cogs available for sale
cost of goods available for sale or use is the sum of (1) the cost of the goods on hand at the beginning of the period, and (2) the cost of the goods acquired or produced during the period
The cost of goods sold is the difference between (1) the cost
of goods available for sale during the period, and (2) the cost of goods on hand at the end of the period
Valuing inventories can be complex
1. The physical goods to include in inventory (who owns the goods?—goods
in transit, consigned goods, special sales agreements).
2. The costs to include in inventory (product vs. period costs).
3. The cost fl ow assumption to adopt (specifi c identifi cation, average-cost,
FIFO, LIFO, retail, etc.)
Goods in Transit
f.o.b. shipping point, title passes to buyer when the supplier delivers the goods to the common carrier, who
acts as an agent for buyer (The abbreviation f.o.b. stands for free on board.)
If the supplier ships the goods f.o.b. destination, title passes to Buyer only when it receives the goods from the common carrier
title remains with consignor
the cosignor includes the goods in its inventory at purchase price or production cost.
Special Sales Agreements
1. Sales with buyback agreement.
2. Sales with high rates of return.
Sales with Buyback Agreement
when a repurchase agreement exists, the seller report the
inventory and related liability on its books.
Although the seller has transferred legal title, they have retained the risks and rewards of ownership by entering into a buyback agreement
Sales with High Rates of Return
when the seller can reasonably estimate the amount of returns, it should consider the goods sold but
establish a return liability for the amount of the estimated returns. Conversely, if returns are unpredictable, the seller should not consider the goods sold and it should
not remove the goods from its inventory. 
Ending Inventory Misstated
If ending inventory is understated, working capital (current assets less current liabilities)
and the current ratio (current assets divided by current liabilities) are understated.
If cost of goods sold is overstated, then net income is understated
are those costs that "attach" to the inventory. As a result, a company
records product costs in the inventory account. These costs are directly connected with
bringing the goods to the buyer's place of business and converting such goods to a
are those costs that are indirectly related to the acquisition or production of
goods. Period costs such as selling expenses and, under ordinary circumstances, general
and administrative expenses are therefore not included as part of inventory cost
The use of a Purchase Discounts account in a periodic inventory system indicates that the company is reporting its purchases and accounts payable at the gross amount
this gross method, it reports purchase discounts as a deduction from purchases on the income statement.
cost flow assumptions
several systematic inventory cost flow assumptions
calls for identifying each item sold and each item in inventory.
under specific identification the cost flow matches the physical flow of the goods
the average-cost method prices items in the inventory on the basis
of the average cost of all similar goods available during the period
moving-average method with perpetual inventory records
In this method, Call-Mart computes a new average unit cost each time it makes a purchase
The FIFO (first-in, first-out) method assumes that a company uses goods in the order in which it purchases them
In all cases where FIFO is used, the inventory and
cost of goods sold would be the same at the end of the month whether a perpetual or periodic system is used.
(last-in, first-out) method matches the cost of the last goods purchased
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