Textbook Notes (369,154)
Canada (162,425)
BUS 251 (101)
Chapter 7

Chapter 7 notes.docx

4 Pages

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 obsolesce  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 product)  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 statement Acquisition cost  Laid down cost: the cost to get the inventory ready for sale BUS 251 Chapter 7 Notes o Invoice price, tariffs, duties, handling costs  We treat the cost by its period instead of individual item  Equation to value inventory: o Beginning inventory + purchases of inventory made during the year = total costs of goods available for sale during the year – ending inventory = cost of goods sold  For manufacturing companies, 3 material inventory accounts are used to value inventory and the goods are transferred to the next accounts until it is transferred to cost of goods sold in the end  Lower of cost and net realizable value o Direct method: the ending inventory is lower to NRV and debit cost of goods sold o Allowance method: a contra asset accounts are used to record all the NRV  Debit loss due to market decline in inventory and credit XA accounts o But there is a problem that the unrealizable losses are hidden in COGS expense o Example: when the selling price has dropped blow the cost, the company will experience a loss in the next period that is why we adjust the cost during this period so when it is sold in the next period no profit will be earned Inventory systems  How do company keep track of their inventory to make sure that it is not lost or stolen?  Number of units sold during the period and the number that is remaining o Find out the value of COGS o Reordering of inventory if it is running low o Set level of production in the next period  Cost of goods sold during the period and how much cost is remaining o Prepare FS and make decision for pricing  There are 2 types of system that track the number of units sold and their costs o Physical system tells us how many units are sold o Cost inventory system tells us number of units x the cost of those units  Goods available for sale: the sum of cost of the beginning inventory and the units purchased this period  Problem: deci
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