Page 17 - Demo

CH(1): Journal entries %u2013Perpetual Inventory system14How a company classifies its inventory depends on whether the firm is a merchandiser or a manufacturer. In a merchandising company,inventory consists of many different items. For example, in a grocery store, canned goods, dairy products, meats and produce are just a few of the inventory items on hand. These items have two common characteristics: (1) They are owned by the company, and (2) they are in a form ready for sale to customer in the ordinary course of business. Thus, merchandisers need only one inventory classification, merchandise inventory to describe the many different items that make up the total inventory.In a manufacturing company, some inventory may not yet be ready for sale. As a result, manufacturers usually classify inventory into three categories: finished goods, work in process, and raw materials. Finished goods inventory is manufactured items that are completed and ready for sale. Work in process is that portion of manufactured inventory that has been placed into the production process but is not yet complete. See sheet, raw materials are the basic commonused in the production of goods.Determining Inventory Quantities:Companies need to determine inventory quantities at the end of the accounting period. If using a perpetual inventory system, companies take a physical inventorycountfor two reasons:1-To check the accuracy of their perpetual inventory records.2-To determine the amount of inventory lost due to wasted raw materials, shop lifting, or employee theft.Determining Inventory Items:Merchandise inventory includes all goods that a company owns and holds for sale. This rule holds regardless of where the goods are located when inventory is counted. Certain inventory items require special attention, including goods in transit, goods on consignment, and goods thatare damaged or obsolete. 2-Describe the steps in determining inventory quantities.3-Identify the items making up merchandise inventory.