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Chapter 7

BUS 251 Chapter Notes - Chapter 7: Historical Cost, Physical System, Financial Statement

Business Administration
Course Code
BUS 251
Steve Gibson

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BUS 251 Chapter 7 Notes
Chapter 7: Inventory
Inventory is anything that you buy and will resale in the future
Generate major source of revenue through selling of inventory
Used to determine cost of goods sold linked to the financial statements
Inventory recognition and cost of goods sold
Meet the asset recognition:
o Bring future economic benefit to the company
o The company possession and by legal title (contract)
o Indicate past transaction occurred
Involves uncertainty of accounts receivable collection and inventory may face the problem of
Once inventory is sold it is transferred to cost of goods sold which is the process that it is turned
to an expense from an asset
Valuation criteria
Historical cost
o Carry inventory at the cost it was acquired
o No recognition of changes in the inventory’s market value when it is held
Market value
o Wholesale market: when the retailer buys its company products
If the market price can be found in the market where inventory is bought then the
amount that is needed to replace it is called “replacement cost
o Input market: the market from which the inventory is bought
The good enters the company from this market
o Retail market: measure of market value when the company sells it products
Retail market > wholesale market
o Output market: companies sell their products
Net realizable value: the price of exit market (selling costs to incurred to sell the
Net: costs against selling price
o Replacement cost:
Inventory is carried over to replacement cost
Historical cost unrealized gain/loss changes in replacement cost selling of
the product realized profit/loss
o Net realizable cost:
Acquisition difference between net realizable value and historical cost
unrealized profit/loss selling of product no profit is recognized
Item has already been recorded at it net realizable value
Canadian practice
o Lower cost and net realizable value rule at the end of the period
o Net realizable value < historical cost then we record NRV
Inventory amount on the balance sheet and a loss is recorded on the income
Acquisition cost
Laid down cost: the cost to get the inventory ready for sale
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