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Chapter 7 - Reading Notes.docx

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Management Core
MGCR 211
Erica Pimentel

Chapter 7 Notes Inventory Valuation crierita - historical cost - market value - replacement cost - net realizable value Acquisition costs - the cost value that is originally assigned to inventory should contain all laid- down costs - however, often impractical to assign costs to many different items that arrive together in one shipment - therefore, companies treat these costs as period costs equation: beginning inventory + purchases of inventory made during the year = total cost of goods available for sale during the year once you have te cost for the total goods available for sale during the year, you can deduct the cost of the goods that remain unsold at the end of the year (ending inventory) beginning inventory + purchase = cost of goods available for sale. – ending inventory = COGS. Lower of Cost and Net Realizable Value - at the end of every accounting period, most companies therefore compare the cost of the inventory with its market value and apply the lower of cost and net realizable value rule. Direct method - the ending inventory is reduced to the lower NTV, which causes the COGS amount to rise in the statement of earnings. - IFRS Indicates that inventory should be recognized at Lower of Cost or NRV - In line with principle of being conservative - Reduces the amount of bias or estimates that are included in the inventory figure Inventory Systems - two types of info needed about inventory o the number of units sold during a period o the number that remain perpetual inventory systems  keep track of units and/or their associated costs on a continuous basis.  when a unit it sold, it is immediately removed from the inventory account.  credit to the account at the time of sale periodic inventory system  there is no entry to record the reduction in inventory at the time of sale.  company must do inventory counts periodically and physically the COGS is then determined by subtracting the ending inventory value from the sum of the beginning inventory value and the purchases made in that period.  this process assumes that al the items were indeed sold, which may not always be the case. Does not give room for theft, damage, etc. costs and benefits of system choice perpetual = most expensive, but more advantageous to managrs inventory shrinkage  losses of inventory due to theft, damage, and spoilage periodic system unable to identify shrinkage b/c shrinkage is a part of COGS when (THE EQUATION) perpetual system identifies shrinkage b/c the system tells the company what the ending inventory should be – the compa
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