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Chapter 5

Chapter 5. Accounting for Inventories. Determining Inventory Items. C 1. Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include:. Goods in Transit.

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Chapter 5

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  1. Chapter 5 Accounting for Inventories

  2. Determining Inventory Items C 1 Merchandise inventory includes all goods that a company owns and holds for sale, regardless of where the goods are located when inventory is counted. Items requiring special attention include: Goods in Transit Goods Damaged or Obsolete Goods on Consignment

  3. FOB Shipping Point Public Carrier Seller Buyer Ownership passes to the buyer here. Public Carrier Seller Buyer FOB Destination Point Goods in Transit C 1

  4. Goods on Consignment C 1 Merchandise is included in the inventory oftheconsignor, the owner of the inventory. Thanks for selling my inventory in your store. Consignee Consignor

  5. Goods Damaged or Obsolete C 1 Damaged or obsolete goods are not counted in inventory. Cost should be reduced to net realizable value.

  6. Determining Inventory Costs C 2 Include all expenditures necessary to bring an item to a salable condition and location. Invoice Cost Minus Discounts and Allowances Plus Insurance Plus Import Duties Plus Storage Plus Freight

  7. Most companies take a physical count of inventory at least once each year. When the physical count does not match the Merchandise Inventory account, an adjustment must be made. InventoryCount Tag Quantity Counted ___ Countedby _______ Internal Controls and Taking a Physical Count C 2

  8. Exh. 5.1 Frequency in Use of Inventory Methods P1

  9. Inventory Cost Flow Assumptions P1 First-In, First-Out(FIFO) Assumes costs flow in the order incurred. Last-In, First-Out(LIFO) Assumes costs flow in the reverse order incurred. Weighted Average Assumes costs flow at an average of the costs available.

  10. When units are sold, the specific cost of the unit sold is added to cost of goods sold. Specific Identification P1

  11. Cost of Goods Sold Ending Inventory First-In, First-Out (FIFO) P1 Oldest Costs Recent Costs

  12. Cost of Goods Sold Ending Inventory Last-In, First-Out (LIFO) P1 Recent Costs Oldest Costs

  13. When a unit is sold, theaverage costof each unit in inventory is assigned to cost of goods sold. ÷ Cost of Goods Available for Sale Units on hand on the date of sale Weighted Average P1

  14. Because prices change, inventory methods nearly always assign different cost amounts. Financial Statement Effects of Costing Methods A1

  15. Smoothes out price changes. Ending inventory approximates current replacement cost. Better matches current costs in cost of goods sold with revenues. Financial Statement Effects of Costing Methods A1 Advantages of Methods Weighted Average First-In, First-Out Last-In, First-Out

  16. The Internal Revenue Service (IRS) identifies several acceptable methods for inventory costing for reporting taxable income. Tax Effects of Costing Methods A1 If LIFO is used for tax purposes, the IRS requires it be used in financial statements.

  17. The consistency principle requires a company to use the same accounting methods period after period so that financial statements are comparable across periods. Consistency in Using Costing Methods A1

  18. Exh. 5.10 Financial Statement Effects of Inventory Errors A2 Income Statement Effects

  19. Exh. 5.12 Financial Statement Effects of Inventory Errors A2 Balance Sheet Effects

  20. End of Chapter 5

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