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Notes for March 7 and 9

by: Callisa Ruschmeyer

Notes for March 7 and 9 ACCT 2110 - 002

Marketplace > Auburn University > Accounting > ACCT 2110 - 002 > Notes for March 7 and 9
Callisa Ruschmeyer
GPA 4.0

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About this Document

Due to my Spring Break plans, I am uploaded notes for just two days this week. Friday, March 11th's notes will be included in my next post. All of these notes are for Chapter 6 (ending with the ...
Principles of Financial Accounting
Elizabeth G Miller
Class Notes
financial accounting, Miller, Auburn University, chapter 6, Inventory Cost Methods
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This 8 page Class Notes was uploaded by Callisa Ruschmeyer on Wednesday March 9, 2016. The Class Notes belongs to ACCT 2110 - 002 at Auburn University taught by Elizabeth G Miller in Fall 2015. Since its upload, it has received 28 views. For similar materials see Principles of Financial Accounting in Accounting at Auburn University.


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Date Created: 03/09/16
March 7 and 9 th Chapter 6 Inventory  Tangible assets held for resale  "intended for resale"- differentiates inventory from other operational assets  When companies sell their inventory to customers, the cost of the inventory becomes an expense called cost of goods sold  Gross Margin- key performance measure o Gross margin = net sales - cost of goods sold  Inventory is broken into three categories: raw materials, work-in process, and finished goods Types of Companies  Merchandisers- companies that purchase inventory in finished condition o Merchandise inventory- inventory held by merchandisers  Retailers- merchandisers that sell directly to consumers  Wholesalers- merchandisers that sell to other retailers  Manufacturers- companies that buy and transform raw materials into a finished product- and then it is sold Cost of Goods Sold Model Beginning Inventory (+) Net Purchases _________________ Cost of Goods Available for Sale (-) Ending Inventory _________________ Cost of Goods Sold  We need enough inventory to sell, but also have some left over to begin the next period Types of Inventory Systems  Perpetual- cost of goods sold updated with each sale o Constant, never changes o Inventory account- always added to or subtracted from  Periodic- Cost of goods sold are recorded only at the end of a period o Regular, but every once in awhile o At the end of the period- we make on journal entry for all of the inventory o Advantage- relatively inexpensive to operate Recording Inventory  Cost of inventory = purchase price of merchandise + any cost of bringing the goods to salable condition and location o Cost of inventory includes: "incidental" costs- like freight charges to deliver the merchandise to the company's warehouse, insurance cost on the inventory while it is in transit, and various taxes  Purchases- cost of merchandise acquired for resale during the accounting period  Purchase of inventory is recorded by increasing the inventory account Purchase Discounts- Perpetual System  Buyer credits the inventory account for the amount of a purchase discount  Credit terms specify the amount and timing of payments  Discount period- a period when prompt payment is rewarded by offering a discount  Perpetual system- buy goods with discount: debit accounts payable; credit cash and inventory  If no discount is taken, there is no effect on inventory Purchase Returns and Allowances- Perpetual System  Purchase return- cost of merchandise returned to suppliers  Purchase allowance- when the buyer chooses to keep the merchandise if the seller is willing to grant a deduction (the allowance) from the purchase price  Buyer credits the inventory account for the amount of a purchase return or allowance Transportation Costs- Perpetual System  Transportation (freight) costs are expenditures  The proper recording of transportation costs depend on whether the buyer or the seller pays for the transportation  F.O.B shipping point- the buyer pays the transportation costs o Freight-in  F.O.B destination- the seller pays the transportation costs o Freight out  Buyer debits the inventory account for the transportation costs paid Consignments  Definition- goods owned by one party are held and offered for sale by someone else  Consignor- original owner (retains ownership)  Consignee- seller (earns a fee for selling) Recording Sales of Inventory (Sellers Standpoint)  Merchandising companies must also account for the inventory effects of sales and sales returns  Under perpetual inventory, the merchandise inventory account is also affected Sales-Perpetual System  Sales revenue is recognized when it is earned and the collection of cash is assured  Sales are recorded with two journal entries 1. Sales revenue is recognized  Debit- Account Receivables  Credit- Sales Revenue 2. Recognizes the cost of goods sold  Debit- Cost of Goods Sold  Credit- Inventory Sales Returns and Allowances- Perpetual System  Returns and allowances are recorded with two journal entries 1. Customer Returns goods  Debit- Sales Returns and Allowances (contra revenue account)  Credit- Accounts Receivable (or cash) 2. Adjust Inventory  Debit- Cost of Goods Sold  Credit- Inventory Cost Inventory  Basically discusses the difference of goods available for sale between ending inventory and cost of goods sold  The price of goods change over time, so the cost of goods available for sale may include units with different costs per unit  Useful Formulas o Ending Inventory X Cost per Unit = Cost of Ending Inventory o Units Sold X Cost per Unit = Cost of Goods Sold 1. Specific Identification Method  Cost of ending inventory and the cost of goods sold based on the identification of the actual units sold and in inventory  Must have detailed records of each purchase and those for high-cost items o Example- car dealerships (VIN numbers); costs with bar codes  This method is not used very much 2. First-in, First-out (FIFO)  Based on the assumption that costs move through inventory, the earliest purchases (first in) are assumed to be the first sold (the first out)  Basically, the first goods sold are sold at the price of the oldest of all the goods…and the last goods sold are sold at the price of the youngest of all the goods  Example- gas prices rising 3. Last-in, First-out (LIFO)  Based on the assumption that the most recent purchases (the last in) are the first ot be sold (the first out)  Basically, the first goods sold are sold at the price of the youngest of all the goods…and the last goods are sold at the price of the oldest of all the goods  Exception- companies that stockpile inventory- this cost flow assumption rarely coincides with the actual physical flow of inventory 4. Average Cost or Moving Average  Allocates the cost of goods available for sale between ending inventory and cost of goods sold based on a weighted average cost per unit  Weighted Avg. Cost per Unit = Cost of Goods Available for Sale / Units Available for Sale  Ending Inventory = Units on Hand X Weighted Average Cost per Unit  Cost of Goods Sold = Units Sold X Weighted Average Cost per Unit Worked Out Problems


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