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ACC 110 (66)
Chapter 7

Chapter 7

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Department
Accounting
Course
ACC 110
Professor
Brad Mac Master
Semester
Fall

Description
Chapter 7 – Inventory Inventory: Asset held for sales or assets used to produce goods that will be sold as part of the entity’s normal business activities. Include materials and supplies used to provide a service to customers. Raw Materials: The inputs into the production process. For example, raw materials inventory for a furniture manufacturer includes wood used to build the furniture. Work-in-process (WIP): Inventory that partially completed on the financial statement data. Finished Goods: Inventory that has been completed and is ready for sale. One entity’s inventory is another’s equipment and one entity’s finished good is another’s raw material. Perpetual Inventory Control System: Keeps an ongoing tally of purchases and sales of inventory, and the inventory account is adjusted to reflect change as they occur. It can determine cost of sales at any time. Dr. Inventory (Asset+) xxx Cr. Accounts payable (Liability +) or cash (Asset -) xxx When inventory is sold then record journal as: Dr. Cash (asset +) or accounts receivable (asset +) xxx Cr. Revenue (Revenue+, equity +) xxx Dr. Cost of sales (Expense +, equity +)xxx Cr. Inventory (asset -) xxx Periodic inventory control system: Inventory account isn’t adjusted whenever a transaction affects inventory. Adjustments in inventory are made only at the end of period. Purchases are accounted for separately. Cost of sales is determined indirectly. Cost of Sales = beginning inventory + purchase – ending inventory Dr. Purchases (expense+)xxx Cr. Accounts payable (liability +) Cash (asset -) xxx When inventory is sold: Dr. Cash (asset +) Cr. Accounts payable (liability -), Cash (asset -) *No entry records cost of sales until the end of the period after the inventory has been counted. - The following adjusting entry would be: Dr. Cost of sales (expense +) , Dr. Inventory (asset +) and Cr. Purchases (expense -) The three cost formulas allowed by IFRS: First-in, first-out (FIFO), average cost and specific identification - Cost formulas allocate cost between ending inventory and cost of sales. Also ways to move costs from the balance sheet to the income statement, and doesn’t mean it reflects or affect the flow of inventory. FIFO - Cost associated with the inventory that was purchased or produced first is the cost expensed first. Cost of inventory reported on balance sheet represents the cost of inventory most recently purchased or produced. - Costs of goods sold are from oldest purchase.
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