Accounting Categories (Debit and Credit Balances) - Financial Accounting (FAC)
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Hanzehogeschool Groningen (Hanze)
International Business and Management Studies
FAC2
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Inventories
Chapter Number Chapter 6
📖 Table of Contents
Outline
6.1 Classifying and Determining Inventory
Determining Inventory Quantities
6.2 Inventory Methods and Financial Effects
Specific Identification
Cost Flow Assumptions
First-In, First-Out (FIFO)
Average-Cost
Financial Statement and Tax Effects of Cost Flow Methods
Income Statement Effects
Statement of Financial Position Effects
Tax Effects
Using Inventory Cost Flow Methods Consistently
6.3 Effects of Inventory Errors
Income Statement Effects
Statement of Financial Position Effects
6.4 Inventory Statement Presentation and Analysis
Lower-of-Cost-or-Net Realizable Value (LCNRV)
Analysis
6.5 Inventory Cost Flow Methods in Perpetual Inventory Systems
First-In, First-Out (FIFO)
Average-Cost
6.6 Estimating Inventories (Periodic System)
Gross Profit Method
Retail Inventory Method
6.7 LIFO Inventory Method
6.1 Classifying and Determining Inventory
Merchandising company has:
1. inventory owed by the company
Inventories 1
, 2. in a ready-for-sale form
Manufacturing company has:
1. finished goods
2. work in process
3. raw materials
📍 just-in-time (JIT) inventory
companies manufacture or purchase goods only when needed (low inventory levels)
Determining Inventory Quantities
perpetual system, take a physical inventory for the following reasons:
1. To check the accuracy of their perpetual inventory records.
2. To determine the amount of inventory lost due to wasted raw materials, shoplifting, or
employee theft.
periodic inventory system take a physical inventory for two different purposes:
1. to determine the inventory on hand at the statement of financial position date
2. to determine the cost of goods sold for the period.
📢 Determining inventory quantities involves two steps:
1. taking a physical inventory of goods on hand
2. determining the ownership of goods
a. Goods in Transit: purchased and not received ; sold but not delivered
i. FOB shipping point - ownership passes to buyer
ii. FOB destination - ownership of the seller
b. Consigned Goods: hold goods of other parties and sell goods for them for fee
i. ownership is still of the company
6.2 Inventory Methods and Financial Effects
⚠️ Inventory is accounted for at cost.
includes all expenditures to acquire goods and place them in a condition ready for sale
Specific Identification
If company can positively identify which particular units it sold and which are still in ending inventory
→ most companies make cost flow assumptions, about which units were sold
Cost Flow Assumptions
Inventories 2
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