CHAPTER 6        
                          
          INVENTORIES
   After studying this chapter, you should be able to:
    1 Describe steps in determining inventory quantities
    2 Explain the basis of accounting for inventories 
      and describe the inventory cost flow methods
    3 Explain the financial statements and the tax 
      effects of each inventory cost flow method
    4 Explain the lower of cost or market basis of 
      accounting for inventories
    5 Indicate the effects of inventory errors on the 
      financial statements
    6 Compute and interpret inventory turnover 
       INVENTORY BASICS
    • Balance sheet of merchandising and 
     manufacturing companies
      –  inventory significant current asset
    • Income statement
      – inventory is vital in determining results
    • Gross profit
      –  (net sales - cost of goods sold)     
       • watched by management,  owners, and others
   MERCHANDISE INVENTORY 
      CHARACTERISTICS
   Merchandise inventory 
       1 Owned by the company 
       2 In a form ready for sale
    CLASSIFYING INVENTORY IN A 
   MANUFACTURING ENVIRONMENT
     •Manufacturing inventories
       –  may not yet be ready for sale
     •Classified into three categories:
      1 Finished goods  
        ready for sale
      2 Work in process
        various stages of production
         (not completed)
      3 Raw materials 
        components on hand waiting to be used
       DETERMINING INVENTORY 
                     QUANTITIES
                        STUDY OBJECTIVE 1
     To prepare financial statements determine         
                                                                   
     1.   the number of units in inventory by taking a 
          physical inventory of goods on hand physical 
          inventory by counting, weighing or measuring
     2. The ownership of goods