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Chapter 8

BU227 Chapter 8 Textbook Notes.docx

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Dwayne Moore

BU227 Chapter 8 Textbook Notes Nature of Inventory and Cost of Sales:  Items Included in Inventory: o Inventory is tangible property either:  Held for sale in normal course of business.  Used to produce gods/services for sale. o Inventory is reported on the STATEMENT OF FINANCIAL POSITION.  As a CURRENT ASSET. o Merchandise Inventory:  Goods/merchandise geld for RESALE.  Goods are normally acquired in finished condition, and ready to sell immediately. o Raw Materials Inventory:  Items acquired for the purpose of processing into finished goods.  When used, become Work-in-Process inventory. o Work-in-Process Inventory:  Goods in the process of being manufactured.  When complete, becomes finished goods inventory. o Finished Goods Inventory:  Manufactured goods ready for sale.  Costs Included in Inventory Purchases: o Conforms with the COST PRINCIPLE.  Cash equivalent cost. Either the price paid, or consideration given to acquire the asset. o Inventory cost includes the principle of the asset, along with any applicable expenditures directly or indirectly incurred in bringing the item to a useable/saleable condition/location.  This includes such costs as: freight, import duties, etc. o Stop accumulating purchases costs once the materials are READY TO BE SOLD/USED.  Any additional costs related to selling the merchandise, or marketing it, should be included in marketing and selling expenses of the period of sale.  Flow of Inventory Costs: o Merchandisers (Wholesalers and Retailers):  Merchandise is purchased.  Merchandise inventory account increased.  Merchandise is sold  Merchandise inventory is decreased  Cost of sales is increased. o Manufacturers:  Raw Materials are purchased.  Raw materials inventory account increased.  Raw Materials are used in production.  Cost is moved from the raw materials inventory account to the Work-in-Process inventory account.  Work-in-Process Inventory. Materials are being made into saleable goods.  Direct labour cost is added to Work-in-Process inventory account. o Direct labour is the earnings of employees who work directly on product manufacturing.  Factory overhead cost is added to Work-in-Process inventory account. o Factory overhead is ALL OTHER manufacturing costs that are not raw material or direct labour costs.  Ex: salary of the factory supervisor, utilities, security, material handling.  Goods are finished, and ready to sell.  All Work-in-Process account costs are moved to the Finished Goods Inventory account.  Finished goods are sold.  Finished goods inventory account decreases, and Cost of Sales account increases. o Essentially moving from Purchasing/Production Activities to Inventory on the Statement of Financial Position, to Expense on the Income Statement.  Nature of Cost of Sales (COS): o COS is directly related to SALES REVENUE.  Number of units sold * unit costs.  Including all costs of the merchandise purchased or finished goods sold during the period. o Beginning Inventory (BI):  The stock of finished goods you start the accounting period with. o Purchases (P):  Purchases are made during the period, and added to inventory.  Additions to finished goods are added here, as well. o P + BI = Cost of Goods Available For Sale. o Ending Inventory of Finished Goods (EI):  Goods available for sale that are left over/unsold at the end of the period.  The Ending Inventory of one period becomes the Beginning Inventory of the next period. o
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