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Chapter 8

Chapter 8.docx

Business Administration
Course Code
BUS 322
Maureen Fizzell

of 4
Chapter 8:
Inventories: (p.452)
1. held for sale in the ordinary course of business
2. in the process of production for such sale
3. in the form of materials or supplies to be consumed in the production
process or in the rendering of services
Manufacturers inventories: raw materials, work in process, finished goods.(p.453)
Amounts for goods and materials that are on hand but have not yet gone into
production are raw material inventory (p.453)
work-in-process inventory: the cost of the raw material on which production has
started but is not yet complete, plus the direct labour cost applied specifically to
this material and its applicable share of manufacturing overhead costs. (p.453)
cost of goods available for sale or use is the total of the cost of the goods on
hand at the beginning of the period and the cost of the goods acquired or
produced during the period. (p.455)
cost of goods sold is the difference between those available for sale during the
period and those on hand at the end of the period. (p.455)
(p.456) f.o.b. shipping point: buyer’s at time of delivery to common carrier
consignment goods: seller’s
sales with buybacks: seller’s
sales with high rate of return: buyer’s if returns can be estimated
sales with delayed credit terms: buyer’s, if collectibility can be estimated.
cut-off schedule: (p.457)
1. curtailing and controlling the receipt and shipment of goods around the
time of the count
2. marking freight and shipping documents as “before” and “after” the
inveentory count
3. ensuring that receiving reports on goods received before the count are
linked to invoices that are also recorded in the same period.
buyback agreement = product financing arrangement: if the risks and rewards of
ownership have not been transferred, the inventory should remain on the seller’s
books. (p.457)
Sales with high rates of return: if a reasonable prediction of the returns can be
established, then the goods should be considered sold and an allowance for
returns should be estimated and recognized. (p.458)
sales with delayed payment terms: the sale is recorded and the goods are
removed from the seller’s inventory if the cost of the outstanding risk can be
reasonably estimated and matched with the related revenue. (p.458)
purchase Discounts
Gross Method: both the purchases and payable are recorded at the gross
amount of the invoice, and any purchase discounts that are later taken are
credited to a purchase discount account. (p. 458)
Net method: records the purchase and accounts payable initially at an amount
net of the cash discount. If the account payable is paid after the discount period
is over, the discount that is lost is recorded in a purchase discounts lost account.
Vendor rebates: (p.459)
1. if the rebate is discretionary on the part of the supplier, no rebate is
recognized until it is paid or the supplier becomes obligated to make a
2. if the rebate is probable and the amount can be reasonably estimated, the
asset recognition criteria are met and the receivable can be recorded.
3. the amount of the receivable recognized is based on the proportion of the
total rebate that is expected relative to the transactions to date.
product costs: directly connected with bringing goods to the buyer’s place of
business and converting them to a saleable condition. (p.460)
interest costs incurred for an inventory item that takes an extended period of time
to produce or manufacture are considered product costs. (p.461)
basket purchase is based on their relative sales value (p.462)
Perpetual system: (p.463)
1. purchase of merchandise for resale or raw materials for production are
debited to inventory rather than to Purchase.
2. Freight-in is debited and purchase returns and allowances and purchase
discounts are credited to Inventory instead of being accounted for in
separate accounts.
3. the cost of the item sold is recognized at the time of each sale by debiting
Cost of Good Sold and crediting Inventory.
4. Inventory is a control account that is supported by a subsidiary ledger of
individual inventory records. The subsidiary records show the quantity and
cost of each type of inventory on hand.
Periodic System: the cost of goods sold is a residual amount that depends on
first calculating the cost of the ending inventory. (p.464)
Perpetual inventory system: the inventory over and short account may be
reported in the “other revenues and gains” or “other expenses and losses”
section. Not distort the gross profit percentage.(p.465)
Inventory Cost Formula: (p.466)
1. Specific Identification: each item that is sold and each item in inventory
needs to be identified.
2. Weighted average cost formula
3. First-In, First-out
The overriding objectives that underlie the inventory standards and guide
management are as follows: (p.470)
1. choose an approach that corresponds as closely as possible to the
physical flow of goods.
2. report an inventory cost on the balance sheet that is representative of the
inventory’s recent cost.
3. use the same method for all inventory assets that have similar economic
characteristics for the entity.
The lower of cost and net realizable value: First: current asset can be converted
into at least as much cash as the amount reported on the balance sheet. Second,
a loss of utility should be deducted from revenue in the period in which the loss
Net realizable value: the estimated selling price less the estimated costs to
complete and sell the goods.(p.472)
Recording the lower of cost and net realizable value: direct method; allowance
Allowance method: (p.475) the recovery of previously recoginzed loss in
allowance account.
Purchase commitments should not be recorded in the books, whatever it is non-