After studying this chapter, you should be able to:

  1. 1 Identify major classifications of inventory.
  2. 2 Distinguish between perpetual and periodic inventory systems.
  3. 3 Determine the goods included in inventory and the effects of inventory errors on the financial statements.
  4. 4 Understand the items to include as inventory cost.
  5. 5 Describe and compare the methods used to price inventories.

It Should Be Easy, but It Isn't!

The accounting for inventory should be straightforward. You simply determine the cost of the inventory and carry this amount forward until the goods are sold. Unfortunately, the devil is in the details. Questions about whether costs should be inventoried or expensed are sometimes difficult to answer. And in some cases, it is even difficult to determine whether inventory has really been sold. Here are some situations that may test your accounting knowledge.

Case 1

Chocola Company, a manufacturer of chocolate bars, has a sales promotion in which customers receive a free chocolate bar for each bar purchased—a two-for-one special. The sales price of a chocolate bar is €3, and the cost to produce one bar is €1.

Question: When a chocolate bar is sold to a customer, what is the inventory cost that should be assigned to that product? Is it €2 in inventory cost or is it €1 of inventory cost and €1 of selling expense?

Case 2

Wellness Pharmacy offers manufacturers ...

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