Chapter 8.docx

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Financial Accounting
Douglas Kong

Chapter 8 Items included in inventory: held for sale in the normal course of business or used to produce goods or services for sale Merchandisers: companies that do not manufacture the products they sell but simply purchase and sell to customers Manufacturing business inventory includes: - Raw materials inventory: items acquired for the purpose of processing into finished goods. This should also include freight charges if FOB shipping point, inspection and preparation costs and sales and marketing, etc - Work in process inventory: goods in the process of being manufactured. This should include direct labour costs (earnings of employees who work directly on the manufactured products) and factory overhead costs (includes manufacturing costs not covered by raw material or direct labour costs). - Finished goods inventory: manufactured goods complete and available for sale Beginning inventory + Purchases = Costs of goods for sale – Ending inventory = Cost of Sales Internal control of inventory: Separation of responsibility for inventory accounting and physical counting Storage of inventory in a manner that protects it from theft Limiting access to inventory to authorized employees Perpetual Inventory System: records each purchase and sale during the period. Provides up-to-date inventory records. Provides up-to-date cost of sales records. Provides timely info about inventory and costs. Periodic Inventory system: ending inventory and cost of sales are determined at the end of the accounting period based on a physical count. ERROR: UNDERSTATEMENT OF ENDING INVENTORY Year of the error Following Year Beginning inventory NE U* Ending inventory U NE Cost of sales O U Gross profit U O Profit before income tax U
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