Under FIFO, the cost of the ending inventory ¨ When items are indistinguishable from oneĪnother, making it impossible or impractical to track each item's cost, one ofįirst-out (FIFO) method assumes that the earliest goods purchased are theįirst to be sold. No accounting requirement that the cost flow assumption be consistent with the Particular units were sold and which are still in ending inventory. Identification is practical when a company can positively identify which Therefore, there are a number of inventory Inventory have been purchased at different prices. Inventory can be complicated if the units on hand for a specific item of These are called consigned goods.Įxplain the Basis of Accounting for Inventories and Apply the Inventory Costįlow Methods under a Periodic Inventory System Hold the goods of other parties and try to sell the goods for them for a fee,īut without taking ownership of the goods. ¨ In some lines of business, it is customary to Ownership of the goods remains with the seller until the goods reach the buyer. Shipping point, ownership of the goods passes to the buyer when the publicĬarrier accepts the goods from the seller. Included in the inventory of the company that has legal title to the In transit (on board a truck, train, ship, or plane) must be ¨ To arrive at an accurate count, ownership of goods Included in the count belong to the company? Does the company own any goods that were not included in the count? ¨ To determine ownership of goods, two questions ¨ Taking a physical inventory involves actuallyĬounting, weighing, or measuring each kind of inventory on hand. Of goods on hand and (2) determining the ownership of goods. ¨ Determining inventory quantities involves two Take a physical inventory for two different purposes: to determine the inventory on hand at theīalance sheet date, and to determine the cost of goods sold for the period. ¨ Companies using a period inventory system must Materials, shoplifting or employee theft. Inventory records, and to determine the amount of inventory lost due to wasted raw Physical inventory at year-end for two purposes: to check the accuracy of their perpetual ¨ If using a perpetual system, companies take a Quantities at the end of the accounting period. Perpetual inventory system, all companies need to determine inventory ¨ No matter whether they are using a periodic or Observing the levels and changes in the levels of these three inventory types,įinancial statement users can gain insight into management’s production plans. Not yet complete, and raw materials inventory-the basic goods that willĮ used in production but have not yet been placed into production. Manufactured inventory that has been placed into the production process but is Inventory is usually classified into three categories: finished goods inventory-items thatĪre completed and ready for sale, work in process-that portion of Items have two common characteristics: (1) They are owned by the company, and (2) they are in a form ready forĬlassification, merchandise inventory, is needed to describe the manyĭifferent items that make up the total inventory. Importance for comparing results of different companies.ĭescribe the Steps in Determining Inventory Quantities V Describe the LIFO reserve and explain its V Compute and interpret the inventory turnover V Explain the lower of cost or market basis of Of each of the inventory cost flow assumptions. V Explain the financial statement and tax effects V Explain the basis of accounting for inventoriesĪnd apply the inventory cost flow methods under a periodic inventory system. V Describe the steps in determining inventory
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