BUS 251 Chapter Notes - Chapter 7: Consignor, Consignee, Vote Counting

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Ch. 7 – Inventory
INTRODUCTION
- inventory = any item purchased by company for resale to customers/used in manufacture of product
that is then sold to customers
- all companies (except service businesses) have inventory
- merchandiser/retailer = purchase inventory from others to sell at profit
- manufacturer = companies that make products
- inventory usu most significant current asset
 largest asset that will be converted to cash over next year
- management’s objective for inventory: sell it at higher price than company purchased it for
1) select suppliers
 consider location, time, delivery
2) decide how much inventory to purchase from supplier
 do not want too much (will become obsolete), but also want to meet customer demand
 stockout = run out of particular item
3) set sale price so that it is high enough to provide profit for company while remaining
competitive w/ other companies selling same/similar products
4) implement safeguards to prevent damage & loss due to theft
TYPES OF INVENTORY
- raw materials = all items required to make product
- work-in-process = used to record costs of products that have been stared but not completed at end of
accounting period
 incl. cost of raw materials, labour costs, overhead costs (other manufacturing costs) incurred as
product is being made
- finished goods = completed products
 once manufacturing process complete, full cost of making product transferred from Work-in-
Process to Finished Goods account
- FOB (free on board) shipping point = buyer responsible for paying shipping & any other costs incurred
while goods in transit from seller’s premises to buyer’s
 buyer owns inventory when leaves seller’s premises (shipping point) & buyer includes these
goods in inventory even though they haven’t arrived
- FOB destination = seller responsible for paying shipping & any other costs incurred while goods in
transit from seller’s premises to buyer’s
 buyer does not own goods until reaches buyer’s premises (destination) & buyer does not record
inventory until it arrives
- consignment =consignor leaves used items w/ consignee
 as item sells, consignee collects full payment but only earns commission, rest of balance to
consignor
 these goods not part of inventory b/c they belong to consignor
INVENTORY SYSTEMS
- important that companies track inventory to know quantities of product on hand & quantities sold
 management uses this info to make decisions about pricing, production, reordering
- cost of goods avail for sale (COGAS) = opening inventory + cost of purchases
 cost of all goods company had avail to sell to its customers during period
 determine how to allocate COGAS b/t cost of goods sold & cost of goods remaining in inventory
- periodic inventory sys = only update company’s inventory info periodically (once in a while)
 updates only happen when company has physically counted its inventory
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