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chap 6
Chapter 6-1 CHAPTER CHAPTER 6 6 Inventories Financial Accounting, Sixth Edition Chapter 6-2 1. Describe the steps in determining inventory quantities. 2. Explain the accounting for inventories and apply the inventory cost flow methods. 3. Explain the financial effects of the inventory cost flow assumptions. 4. Explain the lower-of-cost-or-market basis of accounting for inventories. 5. Indicate the effects of inventory errors on the financial statements. 6. Compute and interpret the inventory turnover ratio. Study Objectives Study Objectives Study Objectives Study Objectives Chapter 6-3 Reporting and Analyzing Inventory Reporting and Analyzing Inventory Reporting and Analyzing Inventory Reporting and Analyzing Inventory Taking a Taking a physical physical inventory inventory Determining Determining ownership of ownership of goods goods Classifying Classifying Inventory Inventory Classifying Classifying Inventory Inventory Determining Determining Inventory Inventory Quantities Quantities Determining Determining Inventory Inventory Quantities Quantities Inventory Inventory Costing Costing Inventory Inventory Costing Costing Inventory Inventory Errors Errors Inventory Inventory Errors Errors Statement Statement Presentation Presentation and Analysis and Analysis Statement Statement Presentation Presentation and Analysis and Analysis Merchandising Merchandising inventory inventory Manufacturing Manufacturing inventory inventory Specific identification Specific identification Cost flow assumptions Cost flow assumptions Financial statement and tax effects Financial statement and tax effects Consistent use Consistent use Lower-of-cost-or-market Lower-of-cost-or-market Income Income statement statement effects effects Balance sheet Balance sheet effects effects Presentation Presentation Analysis Analysis Chapter 6-4 Classifying Inventory Classifying Inventory Classifying Inventory Classifying Inventory One Classification: Merchandise Inventory Three Classifications: Raw Materials Work in Process Finished Goods Merchandising Company Manufacturing Company Regardless of the classification, companies report all inventories under Current Assets on the balance sheet. Chapter 6-5 Physical Inventory taken for two reasons: Perpetual System 1. Check accuracy of inventory records. 2. Determine amount of inventory lost (wasted raw materials, shoplifting, or employee theft). Periodic System 1. Determine the inventory on hand 2. Determine the cost of goods sold for the period. Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. Chapter 6-6 Involves counting, weighing, or measuring each kind of inventory on hand. Taken, when the business is closed or when business is slow. at end of the accounting period. Taking a Physical Inventory Taking a Physical Inventory Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. Chapter 6-7 Goods in Transit Purchased goods not yet received. Sold goods not yet delivered. Determining Ownership of Goods Determining Ownership of Goods Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. Goods in transit should be included in the inventory of the company that has legal title to the goods. Legal title is determined by the terms of sale. Chapter 6-8 Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. Illustration 6-1 Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ownership of the goods remains with the seller until the goods reach the buyer. Terms of Sale Terms of Sale Chapter 6-9 Goods in transit should be included in the inventory of the buyer when the: a. public carrier accepts the goods from the seller. b. goods reach the buyer. c. terms of sale are FOB destination. d. terms of sale are FOB shipping point. Review Question Review Question Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. Chapter 6-10 Consigned Goods Goods held for sale by one party although ownership of the goods is retained by another party. Determining Ownership of Goods Determining Ownership of Goods Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities Determining Inventory Quantities SO 1 Describe the steps in determining inventory quantities. SO 1 Describe the steps in determining inventory quantities. . Chapter 6- 1 CHAPTER CHAPTER 6 6 Inventories Financial Accounting, Sixth Edition Chapter 6- 2 1. Describe the steps in determining. apply the inventory cost flow methods. Chapter 6- 13 Purchase on 2/2/07 for $10 Purchase on 2/15/07 for $15 Purchase on 2/25/07 for $20 Inventory Balance