Student Manual ACCT 5031 Chapter 7

 CHAPTER 7 
Inventory
LEARNING OBJECTIVES
1.

Identify what items and costs should be included in inventory and cost of goods sold.
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2.

Account for inventory purchases and sales using both a perpetual and a periodic inventory system.
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3.

Inventory is composed of goods held for sale in the normal course of business. Cost of goods sold is the cost of inventory sold during the period.
For a manufacturing firm, the three types of inventory are raw materials, work in process, and finished goods.
All costs incurred in producing and getting inventory ready to sell should be added to inventory cost.
The costs associated with the selling effort itself are operating expenses of the period.
Inventory should be recorded on the books of the company holding legal title.
Goods in transit belong to the company paying for the shipping.
Goods on consignment belong to the supplier/owner, not to the business holding the inventory for possible sale.
At the end of an accounting period, the total cost of goods available for sale during the period must be allocated between ending inventory and cost of goods sold.

With a perpetual inventory system,
 the inventory account is adjusted for every sale or purchase transaction.
 discounts on purchases, returns of merchandise, and the cost of transporting goods intended for resale into the firm are adjustments made directly to the inventory account.
With a periodic inventory system,
 inventory-related items are recorded in temporary holding accounts that are closed to
Inventory at the end of the period.
 closing entries involve closing Purchases, Freight In, Purchase Returns, and Purchase
Discounts to Inventory, and then adjusting the inventory account balance to reflect the results of the ending inventory physical count.

Calculate cost of goods sold using the results of an inventory count and understand the impact of errors in ending inventory on reported cost of goods sold.
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ACCT-5031

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