Principles of Financial Accounting: Chapter 6 Notes

Chapter 6 Lecture Notes – Inventory and Cost of Goods Sold
Inventory – is personal property versus real property – land, buildings


GAAP for Inventory is Lower of Cost or Net Realizable value
GAAP’s intent is to ensure that current assets are not overstated!
Journal entries to write-down inventory to NRV is
Cost of Goods Sold xxxx
Inventory xxxx


Companies recognize Revenue/Sales when title to the inventory passes to the
buyer. Uniform Commercial Code (UCC) governs sales transactions primarily
between sellers and buyers. Originally legislated in the 1930s to facilitate
commerce. Congress was trying to revive our economy after the 1929 Great
Depression


Inventory is a generally a current asset.
Any costs incurred to make inventory available for sale is added to the cost of the
inventory. Regarding inventory purchased if buyer is paying expenses.
Examples:
Freight-in – yes
Transportation-in – yes
Insurance while in transit – yes


Legal Terms inserted into Purchase Order (POs) or Invoices
FOB shipping point – ownerships transfer to buyer when common carrier picks-up
inventory