Chapter Accounting

Compare recorded cost of each inventory item with its replacement cost. List lower of cost or market. 6. Adjust inventory downward when market is less than cost. Physical flow and Cost flow of goods -Perishable items must have an actual physical flow of OAF -Physical flow is focused on the actual movement of goods -Cost flow is an assumption about which goods/items are sold. -A business may adopt any cost flow assumption when accounting for perishable items. Determine cost of goods sold for X-mart, assuming that beginning inventory was ,000.

Net purchases were $20,000 and ending inventory was $9,000.

Beginning inventory + Net purchases – Ending inventory = Cost of goods sold 5000 + 20000 – 9000= 1 6000 Spark’s incorrectly included inventory that was on consignment in its ending inventory count. The ending inventory was overstated on the balance sheet. Explain how this error will effect this year’s income statement. -This year’s cost of goods sold will be too low -This years net income will be too high. Consigned goods: Should be included in the consignors inventory Goods Damaged or Obsolete -Damaged goods are not included in inventory if they cannot be sold.

Damaged goods are included in inventory at their net realizable value. ;If damaged goods can be sold at a reduced price, they are included in inventory. -A loss in value is reported in the period when goods are damaged or become obsolete. Days’ sales in inventory Ending inventory/COGS x 365 Inventory turnover = COGS/Average inventory Inventory turnover ratio assesses: How quickly a company is selling its merchandise, so that it can generate cash to pay debts. Full-disclosure principle: The notes to the financial statements describe the change, its justification, and its effect on income.