Understanding Accounting for Inventories: Role, Valuation

CHAPTER 8 Accounting for Inventories Learning Objectives: After studying this chapter, you should have an understanding of 1.The role of inventory in firms 2.Physical vs cost flows 3.GAAP valuation methods 4.Inventoriable costs 5.Impact of inventory errors 6.Valuation at NRV (the lower of cost and market comparison) 7.Periodic vs perpetual system 8.Estimation methods 9.Write-downs and disclosures Merchandise Inventory - Goods held for sale by a retail or wholesale business are called merchandise inventory. Manufacturing Inventory - Goods held for sale by a manufacturing company are called finished goods inventory. The inventories of manufacturing firms also include raw materials inventory (materials being stored that will become part of goods to be produced) and work-in-process inventory (partially completed products in the factory).. Inventory is a significant asset, and the sale of inventory provides the major source of revenue. Deciding on the optimal level of inventory to carry is among the most difficult and critical decisions facing management. Clearly, a firm can sell more goods in a period than it can purchase or produce only if it has a beginning inventory. COSTS OF GOODS SOLD = Opening Inventory + Net Purchases - Closing Inventory Inventory is a balance sheet account inventory costs of a merchandising firm include: purchase price ,transportation , receiving costs , unpacking , customs duties , inspecting , shelving costs , booking and recording costs inventory costs of a manufacturing firm include: direct materials , direct labor , manufacturing overhead PERIODIC SYSTEM inventory records are only updated at the time of a physical stock-taking temporary accounts Purchases, and its contra accounts - Purchase Returns and Allowances and Purchase Discounts - are used to accumulate purchase information during the accounting period 1.Dr Cost of Goods Sold (to balance the journal entry) 2.Dr Purchase Returns and Allowances (adjust balance to $0) 3.Dr Purchase Discounts (adjust balance to $0) 4.Dr Inventory (iff Inventory increased - by the increase) 5.OR Cr Inventory (iff Inventory decreased - by they decrease) 6.Cr Purchases (adjust balance to $0) To adjust Inventory and Cost of Goods Sold based on the physical count and 'clear the temporary purchase accounts.