Chapter 7 - Merchandise inventory. In this chapter students will be able to: List the four important issues that must be addressed when accounting for inventory, and briefly describe how inventory valuation affects earnings; describe how to decide which costs to capitalize in the inventory account;. | 1 Chapter 7: Merchandise Inventory 2 2 Merchandise Inventory What is inventory? Items held for resale to customers Who has inventory? Wholesaler or Retailer Merchandise Inventory Manufacturer Raw Materials Work in Process Finished Goods 3 3 4 The Relative Size of Inventories Figure 7-1 Inventory as a percentage of total assets and current assets 4 Four Important Inventory Issues Acquiring inventory: What costs to capitalize? Recording inventory activity: Which method? Selling inventory: Which cost flow assumption? Ending inventory: Lower-of-cost-or market valuation. 5 5 6 Figure 7-2 Accounting for Inventory: Four Important Issues 6 Acquiring Inventory What items or units to include? General rule: complete and unrestricted ownership. Ownership is usually possession; however, there are exceptions Consignment consignee takes physical possession but does not take ownership Goods in transit FOB Shipping Point – seller is responsible for (owns) goods only until they are loaded on the common carrier FOB Destination – seller is responsible for goods until they arrive at the destination (buyer). 7 7 Acquired Inventory: Which costs to attach? Which costs are included in inventory? General rule: all costs associated with manufacture, acquisition, storage or preparation of inventory including shipping to facility. Freight-in (transportation-in) adds to the cost of inventory. Purchase returns reduce the cost of purchases (contra) for returned inventory. Purchase allowances reduce the cost of purchases (contra) for reduced prices due to damage or errors. Purchase discounts from early cash payments (contra) reduce the cost of purchases. 8 8 Figure : Perpetual Inventory 9 Carrying Value: Perpetual Method Maintaining a continuous record 9 Exercise E7-6 2012 2011 Sales $1,443 $1,369 Cost of Goods Sold (COGS): BI $220 $194 Purchases 983 915 GAS $1,203 $1,109 Less: EI 244 220 COGS 959 889 Gross Profit $484 $480 10 10 E7-6 Assume that counting errors caused the ending inventory . | 1 Chapter 7: Merchandise Inventory 2 2 Merchandise Inventory What is inventory? Items held for resale to customers Who has inventory? Wholesaler or Retailer Merchandise Inventory Manufacturer Raw Materials Work in Process Finished Goods 3 3 4 The Relative Size of Inventories Figure 7-1 Inventory as a percentage of total assets and current assets 4 Four Important Inventory Issues Acquiring inventory: What costs to capitalize? Recording inventory activity: Which method? Selling inventory: Which cost flow assumption? Ending inventory: Lower-of-cost-or market valuation. 5 5 6 Figure 7-2 Accounting for Inventory: Four Important Issues 6 Acquiring Inventory What items or units to include? General rule: complete and unrestricted ownership. Ownership is usually possession; however, there are exceptions Consignment consignee takes physical possession but does not take ownership Goods in transit FOB Shipping Point – seller is responsible for (owns) goods only until they are loaded on the .
