Chapter Review

Key Takeaways

• Inventory is reported as a current asset and directly affects cost of goods sold.
• Manufacturing companies classify inventory as raw materials, work in process, and finished goods.
• Inventory includes all costs necessary to acquire or produce goods.
• Perpetual systems continuously update inventory, while periodic systems update inventory at period-end.
• Common cost flow assumptions include FIFO, weighted average, and specific identification.
• Inventory is measured at the lower of cost and net realizable value when appropriate.
• Inventory errors affect both income and assets and often reverse in the following period.
• Ownership depends on legal title, shipping terms, and consignment arrangements.
• Inventory turnover and days in inventory are important analytical ratios.

Accurate inventory accounting is essential because every dollar assigned to inventory changes both the balance sheet and the income statement.