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Kirkland Furniture is a manufacturing plant that makes a variety of​ tables, benches, and other furniture. Indicate which inventory​ account(s) would be affected by the following actions that occur at​ Kirkland's in the process of manufacturing its standard picnic tables. Also indicate whether the inventory account would increase or decrease as a result of the action. ​
a. Lumber is delivered by the supplier to the plant, where it is stored in a materials storeroom until needed.
b. Lumber is requisitioned from the storeroom to be used for tops and seats for the tables.
c. Factory workers cut the lumber for the tables.
d. Five tables are completed and moved to the inventory storage area to await sale.
e. A customer purchases a table and takes it home.

Respuesta :

Answer:

a. Raw Materials account would increase

b. No effect on any inventory account

c. Work in Process account would increase and Raw Materials account would decrease

d. Finished Goods account would increase and Work in Process account would decrease

e. Finished goods account would decrease

Explanation:

Inventory is also know as stock-in-trade which if the term given to current assets owned by a company with the intention of selling within a maximum stipulated time of 1 year. There are several other accounting rules that determine classification of inventory. However, for the purposes of the question at hand, this summary should suffice.

For a manufacturing firm, within inventory, items can be categorized into 3 sub-segment: Raw Materials, Work in Process, and Finished Goods. Raw materials are input items that will be on during the manufacturing cycle for conversion into finished goods which would then be sold. Work in Process, as the name suggests, are the items in inventory which are already in the manufacturing process and some changes have already been made to the items from their original states. Finished goods are, of course, the end product that results from the completion of the manufacturing process.

Now, when the lumber is delivered by the supplier to the plant, the company would record that asset onto its books under the Raw Materials account to reflect ownership of risks & rewards associated with the asset as this is what the company would utilize in its manufacturing process.

When lumber is requisitioned, the manufacturing process has not yet started and no changes have been made on the raw material. The asset would still be classified as a raw material which is why there would be no impact of any inventory account.

When factoring workers cut the lumber, the changes to the material have started taking place which is why the asset would be transferred from the Raw Materials account to the Work in Process inventory account.

Once the manufacturing process has been completed, i.e the tables are completed, the asset classified as Work in Process would be transferred to Finished Goods account (the value would of course change on the basis of additions made in terms of cost).

Finally, when the sale is made, the Finished Goods inventory account would decrease to record the sale and the associated Cost of Goods Sold.

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