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Chapter 6

by: Evelin Notetaker

Chapter 6 ACCT 2331

Evelin Notetaker
GPA 2.5
Acct Principles I
Kiran M Parthasarathy

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About this Document

These notes are over chapter 6 which basically covers inventory.
Acct Principles I
Kiran M Parthasarathy
Class Notes
inventory LIFO FIFO
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This 4 page Class Notes was uploaded by Evelin Notetaker on Saturday October 17, 2015. The Class Notes belongs to ACCT 2331 at University of Houston taught by Kiran M Parthasarathy in Summer 2015. Since its upload, it has received 43 views. For similar materials see Acct Principles I in Accounting at University of Houston.

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Date Created: 10/17/15
Accounting 2331 Chapter 6 Manufacturing or merchandising companies ear revenue from selling inventory Inventory falls under current assets on the balance sheet Not sale price Cost of inventory Cost of goods sold COGS Is reported on the income statement totals the cost of inventory sold Sale of products not services Merchandising companies are those that purchase finished goods They resale to customers Do not manufacture the goods Can be wholesalers or retailers Categorize goods as inventory Manufacturing companies create products They buy inputs to make products Three categories raw materials workinprocess and finished goods Raw materials is what is used to create product Workinprocess is started but unfinished good Finished goods are when the manufacturing process is complete This is shown on the balance sheet Beginning inventory Purchases Total inventory Total inventory Ending Inventory Cost of Goods Sold COGS Total revenues total expenses net income Single step income statement consists of this equation Multiplestep income statement Multiple levels of income Shows revenues and expenses categorized as activities Useful in determining source of company s profitability Sales revenue is sales inventory Net sales total sales revenue sales discountsreturnsallowance Inventory cost methods Specific identification First in First Out FIFO Last in Last out LIFO Weighted average cost The last three assume a particular pattern Specific Identification method Matched each unit with a price Used for unique expensive products For low sales volume FIFO First items purchased are the first to be recorded as inventory sold LIFO Last units purchased are the first items to be recorded as purchased Weighted Average Cost Random mixture of all goods Cost of goods available for sale units available for sale When inventory costs are rising FIFO is the best option because Higher ending inventory Lower cost of good sold Higher reported profit FIFO is balance sheet focused Better approximate cost of inventory LIFO is income sheet focused COGS matches current costs Choose LIFO for tax savings Lowest reported profits Owe less taxes since less income Free on board FOB Buyer accepts all responsibility shipping costs FOB destination Seller takes care of shipping cost Inventory systems Perpetual keeps a running total and facilitated updating Periodic is no longer used only for inexpensive goods updates once in a while Gross profit ratio Gross profitnet sales Want a higher number Inventory turn over ratio COGSaverage inventory Want a higher number Average days in inventory 365 Inventory turnover ratio want a lower number Lower cost or market value Report on balance sheet lower of two amounts between the cost or market value If the market value is chosen an adjustment has to be made such as if the cost was 29 dollars a unit but the market value is now 20 unit for 15 units the adjustment is Cost of goods sold 135 Inventory 135 135 15 quantity x 9 decline in market below cost


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