Unit 6: Accounting for Inventory – Measuring and Reporting
In order for many businesses to conduct daily activity, they will have to buy merchandise for their end users. There are a number of ways to account for the purchasing and integration of this merchandise within a business, and the decision on how a business entity will account for this from an accounting perspective rests on a number of factors. In this section of the course, you will be introduced to the inventory valuation concepts of FIFO - First in First Out and LIFO - Last in First Out, as well as the concept of weighted-average. Choosing an inventory valuation method is a major decision a merchandising business entity will have to make even before the merchandise is purchased; it is also a decision that dictates the valuation of the merchandise on hand within the business entity.
Completing this unit should take you approximately 7 hours.
Upon successful completion of this unit, you will be able to:
- identify and analyze accounting transactions of a merchandising company; and
- define and solve for specific business situations involving various inventory methods.
6.1: Introduction to Inventories and the Classified Income Statement
Read all of Chapter 6, and please pay particular attention to the section titled, "Two income statements compared— Service company and merchandising company." This reading starts the discussion of the difference in reporting and financial presentation of information for service and merchandising operations. Here you will learn the differences and commonalities there are when recording inventories for two separate types of businesses. You will learn these two different entities record and classify their inventories.
Read this section which focuses on the nature of inventory, categories of goods included in inventory, components of inventory cost, and the flow of inventory costs.
Read this section which focuses on internal controls, perpetual verses periodic counting, conducting a physical inventory, and the impact of measurement error.
6.2: Measuring and Reporting Inventories
This is a continuation of the material learned previously regarding inventories. Since for many organizations, inventory represents a large portion of their assets, it is important that you are familiar with measurement and reporting techniques.
This video presents information on inventory reporting. It also addresses shipping costs and when inventory should be recorded as an asset or not during shipping.
Read this section, which focuses on the four inventory costing methods and the impact each has on the financial statements.
Read this section, which focuses on the lower of cost or market and methods in retail inventory.
Read this section, which focuses on efficiency metrics and the impact of inventory method on financial statement analysis.
Read this section, which focuses on reporting inventories and inventory turnover ratio.
Attempt this practice quiz, which covers inventory reporting, valuation, and costing.
Unit 6 Assessment
Take this assessment to see how well you understood this unit.
- This assessment does not count towards your grade. It is just for practice!
- You will see the correct answers when you submit your answers. Use this to help you study for the final exam!
- You can take this assessment as many times as you want, whenever you want.