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Chapter 6 Notes

by: Amelia Cassidy

Chapter 6 Notes BA 210

Amelia Cassidy

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About this Document

These notes cover chapter 6, as covered in the class lecture and textbook
Financial Accounting
Dr. Greenman
Class Notes
business, Accounting, financial accounting
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This 8 page Class Notes was uploaded by Amelia Cassidy on Tuesday March 1, 2016. The Class Notes belongs to BA 210 at Embry-Riddle Aeronautical University - Daytona Beach taught by Dr. Greenman in Spring 2016. Since its upload, it has received 41 views. For similar materials see Financial Accounting in Business at Embry-Riddle Aeronautical University - Daytona Beach.


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Date Created: 03/01/16
Chapter 6 ­ Inventories      ● Classifying Inventory  ○ Merchandise Inventory Definition  ■ Owned by company  ■ In a form ready for sale to customers in ordinary course of business  ○ Finished Goods Inventory Definition  ■ Manufactured items that are completed and ready for sale  ○ Work In Process Definition  ■ Portion of manufactured inventory that has been placed into the  production process but not yet complete  ○ Raw Materials Definition  ■ Basic goods that will be used in production but have not yet been placed  into production  ○ Just In Time Inventory Definition  ■ Inventory system in which companies manufacture or purchase goods  just in time for use  ● Determining Inventory Quantities  ○ All companies need to:  ■ Check accuracy of perpetual inventory records  ■ Determine amount of inventory lost due to wasted raw materials,  shoplifting, employee theft  ○ Taking a Physical Inventory  ■ Companies take physical inventory at end of each accounting period  ■ Counting, weighing, measuring each inventory on hand  ○ Determining Ownership of Goods  ■ Goods in Transit  ● On board a truck, train, ship, or plane    ● FOB (Free on Board) Shipping Point Definition  ○ Ownership of the goods passes to buyer when public  carrier accepts goods from seller  ● FOB Destination Definition  ○ Ownership of goods remains with seller until goods reach  buyer  ■ Consigned Goods  ● Consigned Goods Definition  ○ Goods held for sale by one party although ownership of  goods is retained by another party  ● Inventory Costing    ○ Specific Identification  ■ Specific Identification Method Definition  ● Actual physical flow costing method in which items still in inventory  are specifically costed to arrive at total cost of ending inventory    ■ Cost Flow Assumptions  ● Companies make assumptions instead of keeping track of cost of  each particular item sold  ○ Cost Flow Assumptions  ■ First­in, First­Out (FIFO)  ■ Last­in, First­out (LIFO)  ■ Average Cost  ■ No accounting requirement that cost flow assumption be consistent  w/physical movement of goods  ■ Use periodic over perpetual    ■ Value Assigned to ending inventory depends on which cost flow method  used  ■ First­In, First­Out (FIFO)  ● FIFO Method Definition  ○ Assumes costs of earliest goods purchased are first to be  recognized as cost of goods sold  ○ Last in, still here    ● Sequence of allocating  ○ Compute end inventory  ○ Determine cost of goods sold  ● Companies obtain cost of end inventory by taking unit cost of most  recent purchase and working backward until all units of inventory  have been costed    ■ Last­In, First­Out (LIFO)  ● LIFO Method Definition  ○ Assumes costs of latest units purchased are first to be  allocated to cost of goods sold    ● Companies obtain cost of end inventory by taking unit cost of  earliest goods available for sale/working forward until all units  have been costed    ● All goods purchased during period are assumed to be available for  first sale, regardless of date of purchase  ■ Average Cost  ● Average Cost Method Definition  ○ Uses weighted­average unit cost to allocate to ending  inventory and cost of goods sold the cost of goods  available for sale  ● Weighted Average Unit Cost Definition  ○ Average cost that is weighted by the number of units  purchased at each unit cost                      ○ Financial Statement and Tax Effects of Cost Flow Methods    ■ Income Statement Effects      ■ Balance Sheet Effects  ● FIFO: In period of inflation, costs allocated to ending inventory will  approximate their current cost  ● LIFO: in period of inflation, costs allocated to ending inventory  may be significantly understated in terms of current cost  ■ Tax Effects  ● LIFO Conformity Rule  ○ If companies use LIFO for tax purposes, they have to use it  for financial reporting  ○ Using Inventory Cost Flow Methods Consistently  ■ Concept of Consistency Definition  ● A company use the same accounting principles/methods from  year to year    ○ Lower­of­Cost­or­Market  ■ Lower­of­Cost­or­Market (LCM) Definition  ● Inventory is stated at lower of either its cost or its market value as  determined by current replacement cost  ■ Current Replacement Cost Definition  ● Current cost to replace an inventory item    ● Inventory Errors  ○ Income Statement Effects        ○ Balance Sheet Effects    ● Statement Presentation and Analysis  ○ Presentation    ○ Analysis  ■ Inventory Turnover Definition  ● Ratio measuring number of times on average the inventory sold  during the period; computed by dividing cost of goods sold by  average inventory during the period    ■ Days in Inventory Definition  ● Measure of average number of days inventory is held; calculated  as 365 divided by inventory turnover ratio 


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