Chapter 6 Notes
Chapter 6 Notes BA 210
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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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