ACCT 351 Lecture Notes - Lecture 8: Current Liability, Income Statement, Weighted Arithmetic Mean
Chapter 8
o Companies must monitor inventory levels carefully to;
o Minimize carrying costs, and
o Meet customer needs
o The cost of goods available for sale or use is the total of:
o the cost of the goods on hand at the beginning of the period and
o the cost of the goods acquired or produced during the period.
o The cost of goods sold is the difference between those available for sale during the
period and those on hand at the end of the period.
o For accounting purposes, inventories are defined as:
o “assets
o Held for sale in the ordinary course of business;
o In the process of production for such sale;
o In the form of materials or supplies to be consumed in the production process or in
the rendering of services.”
o As assets, inventories represent a future benefit, which the entity has control over
or access to. The inventory purchase is the transaction that gives rise to the
recognition of an inventory asset.
o Sometimes purchased goods are in transit—that is, not yet received—at the end of
a fiscal period. Although the company does not yet have possession, we may look
to the legal title to determine whether the goods should be recognized as
inventory. The legal title is deter- mined by the shipping terms that have been
agreed upon between the buyer and the seller. If the goods are shipped FOB
shipping point, the legal title passes to the buyer when the seller delivers the goods
to the common carrier (transporter), who then acts as an agent for the buyer. (The
abbreviation “FOB” stands for “free on board.”) If the goods are shipped FOB
destination, legal title passes when the goods reach the destination.
o What would happen if the beginning inventory and purchases are recorded
correctly, but some items are omitted from ending inventory by mistake? For
example, if items were in the warehouse but were missed in the physical count, or
they were out on consignment? The effects of this error on the financial statements
at the end of the period are:
o Statement of financial position
o Inventory – understated
o Retained earnings – understated
o Working capital (current assets less current liabilities) – understated
o Current ratio – understated
o Income statement
Document Summary
The inventory purchase is the transaction that gives rise to the recognition of an inventory asset: sometimes purchased goods are in transit that is, not yet received at the end of a fiscal period. Although the company does not yet have possession, we may look to the legal title to determine whether the goods should be recognized as inventory. The legal title is deter- mined by the shipping terms that have been agreed upon between the buyer and the seller. These costs are directly connected with bringing goods to the buyer"s place of business and converting them to a saleable condition. This means that the cost of all purchases and the cost of the items sold (or issued out of inventory) are recorded directly in the inventory account as the purchases and sales occur. The accounting features of a perpetual inventory system are as follows: purchases of merchandise for resale or raw materials for production are debited to.
