Business Administration 2257 Chapter Notes -Perpetual Inventory, Dell, Tangible Property
Course CodeBusiness Administration 2257
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CHAPTER 8 (PART II) – REPORTING AND INTERPRETING COST OF
GOODS SOLD AND INVENTORY
Inventory: Tangible property that is…
1. Held for sale in the normal course of business OR
2. Used to produce goods for sale.
Merchandise inventory: Goods held for resale in the ordinary course of business.
Raw materials inventory: Items acquired for the purpose of processing into finished
Work-in-process inventory: Goods in the process of being manufactured.
Finished goods inventory: Manufactured goods that are complete and available for sale.
The company (Dell) should cease accumulating purchase costs when the raw materials
are ready for use, or when the merchandise inventory is ready for shipment.
Added to work-in-progress inventory when incurred in manufacturing process:
1. Direct labor: Refers to the earnings of employees who work directly on the
products being manufactured.
2. Factory overhead: Comprises manufacturing costs that are not raw material or
direct labor costs. Ex: Salary of factory supervisor.
Cost of goods available for sale: Refers to the sum of the cost of beginning inventory and
the cost of purchases (or transfers to finished goods) for the period.
BI = Beginning inventory
P = Purchases
EI = Ending inventory
COGS Equation BI + P – EI = COGS
Control features to safeguard inventories:
1. Separation of responsibilities for inventory accounting and physical handling of
2. Storage of inventory in a manner that protects it from theft and damage.
3. Limiting access to inventory to authorized employees.
4. Maintaining perpetual inventory records.
5. Comparing perpetual records to periodic physical counts of inventory.
Perpetual inventory system: A detailed inventory record is maintained, recording each
purchase and sale during the accounting period.
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