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Chapter 7 - Merchandise inventory. In this chapter students will be able to: List the four important issues that must be addressed when accounting for inventory, and briefly describe how inventory valuation affects earnings; describe how to decide which costs to capitalize in the inventory account;. | 2 Chapter 7: Merchandise Inventory 2 3 Learning Objective 1 List the four important issues that must be addressed when accounting for inventory, and briefly describe how inventory valuation affects earnings. 4 Merchandise Inventory What is inventory? Items held for resale to customers Who has inventory? Wholesaler or Retailer Merchandise Inventory Manufacturer Raw Materials Work in Process Finished Goods 5 The Relative Size of Inventories 6 Four Important Inventory Issues Acquiring inventory: What costs to capitalize? Carrying Inventory: Perpetual vs. Periodic? Selling inventory: Which cost flow assumption? Ending inventory: Lower-of-cost-or-market valuation. 7 Figure 7-2 Accounting for Inventory: Four Important Issues 8 Items should be included in the company’s inventory if they are: a. being used in the production of income. b. held in anticipation of an increase in value. c. being held for sale. d. sold during the period. 9 Which one of the following companies would likely carry . | 2 Chapter 7: Merchandise Inventory 2 3 Learning Objective 1 List the four important issues that must be addressed when accounting for inventory, and briefly describe how inventory valuation affects earnings. 4 Merchandise Inventory What is inventory? Items held for resale to customers Who has inventory? Wholesaler or Retailer Merchandise Inventory Manufacturer Raw Materials Work in Process Finished Goods 5 The Relative Size of Inventories 6 Four Important Inventory Issues Acquiring inventory: What costs to capitalize? Carrying Inventory: Perpetual vs. Periodic? Selling inventory: Which cost flow assumption? Ending inventory: Lower-of-cost-or-market valuation. 7 Figure 7-2 Accounting for Inventory: Four Important Issues 8 Items should be included in the company’s inventory if they are: a. being used in the production of income. b. held in anticipation of an increase in value. c. being held for sale. d. sold during the period. 9 Which one of the following companies would likely carry the largest percentage of inventory as compared to its other assets? a. Ernst and Young, CPAs b. Merrill Lynch investment brokers c. The Magic Kingdom as Disney World d. DJ’s Ford Dealership 10 Learning Objective 2 Describe how to decide which costs to capitalize in the inventory account. 11 Acquiring Inventory – What Costs to Capitalize? What items or units to include? General rule: Complete loss belongs to the company All rights and benefits belong to the company Ownership is usually possession; however, there are exceptions Consignment consignee takes physical possession but does not take ownership Goods in transit FOB Shipping Point – seller is responsible for (owns) goods only until they are loaded on the common carrier FOB Destination – seller is responsible for goods until they arrive at the destination (buyer). 12 What costs to attach? Which costs are included in inventory? General rule: all costs associated with manufacture, acquisition, storage or preparation of inventory .
