Problem Solving Survival Guide Volume I: Chapters 1-12 to accompany Accounting Principles, 11th Edition

CHAPTER 6

INVENTORIES

OVERVIEW

In accounting, the term inventory refers to a stock of goods held for sale in the ordinary course of business or goods that will be used or consumed in the production of goods to be sold. A number of questions regarding inventory are addressed in this chapter. These include: (1) How is the ownership of goods determined? (2) What goods should be included in inventory? (3) How will the selection of a particular cost flow assumption affect the income statement and balance sheet? (4) What is the LCM rule for inventory valuation? (5) How do inventory errors affect the financial statements? (6) How do you compute an estimate of the cost of ending inventory using the gross-profit method? (7) How do you determine the cost of ending inventory using the retail method?

SUMMARY OF LEARNING OBJECTIVES

1. Determine how to classify inventory and inventory quantities. The steps in determining inventory quantities are: (1) take a physical inventory of goods on hand, and (2) determine the ownership of goods in transit or on consignment.
2. Explain the accounting for inventories and apply the inventory cost flow methods. The primary basis of accounting for inventories is cost. Cost includes all expenditures necessary to acquire goods and to place them in a condition ready for sale. Inventoriable costs include the invoice price plus freight-in less purchase discounts and purchase ...