Learning objectives of inventory turnover ratio, Accounting Basics

Q. Learning objectives of inventory turnover ratio?

- Net income for an accounting period depends straight on the valuation of ending inventory.

- If the ending inventory is overstated cost of goods sold is understated resulting in an overstatement of net income, gross margin and retained earnings.

- When ending inventory is misstated in the current year companies take that misstatement forward into the next year.

- An error in the net income of one year caused by misstated ending inventory automatically causes an error in net income in the opposite direction in the next period for the reason that of the misstated beginning inventory.

- Inventory cost comprises all necessary outlays to obtain the goods get the goods ready to sell and have the goods in the desired location for sale to customers.

- Inventory cost includes

a. Seller's gross selling price less purchase discount.

b. Cost of insurance on the goods while in transit.

c. Transportation charges when borne by the buyer.

d. Handling costs such like the cost of pressing clothes wrinkled during shipment.

Posted Date: 7/8/2013 3:00:08 AM | Location : United States

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