C01 Inventories.pdf

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Financial Accounting
Daga Sandra

MGACO1 INTERMEDIATE ACCOUNTING ISDaga Topic INVENTORY TEXT Chapter 8 excl appendix TEXT QUESTIONSE811 E822 P83 Case IC81LEARNING GOALS 1 RECOGNITIONUnderstand key inventory concerns 2 MEASUREMENTKnow what costs are included in inventory and how cost formulas work 3 Be able to estimate Inventory amounts using the Gross Profit methodCLASS OUTLINE LEARNING GOAL 1 RECOGNITIONUnderstand key inventory concerns Inventory A critically important assetitems that are held for sale to make a profitManagement is very interested in inventory quantities in order to prevent stocking up on excessive and unsaleable inventories or being caught without items for saleSince inventory amounts affect balance sheet and income statement amounts they are important in terms of management bonus contracts linked to income earned and bank covenants requiring specific current or debt to equity ratiosInventories are valued at lower of cost and net realizable value1Whats included in Physical Inventory Be careful of what is included and excluded in the inventory amount 1Goods in transitconsider the shipping termsFOB shipping point or FOB destination2 Consigned goods3 Special Sale agreements aProduct financing arrangements b Sales with high rates of return c Sales with delayed payment terms LEARNING GOAL 2 MEASUREMENTKnow what costs are included in inventory and how cost formulas work What Costs are included In Inventory Charges directly connected with bringing goods to the place of business of the buyer and converting such goods to a saleable condition are inventoriable or product costs 1IFRS allows borrowing costs to be capitalized for inventory items that take an extended period of time to produceInterest costs however are generally expensed as incurred because they are considered a cost of financing for ongoing production 2 Vendor rebatesthese are deducted from the inventory cost 3 Purchase Discountsthese are deducted 4 Standard Costsreporting a predetermined unit cost for material labour and manufacturing overhead is acceptable if these costs result in approximating the actual cost 2
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