ADM 1340 Lecture 6: Chapter 6
3 May 2018
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Chapter 6
Study Objectives
• SO 1: describe the steps in determining inventory quantities
• SO 2: apply the methods of cost determination using specific identifications, FIFO, and
average cost under a perpetual inventory system
• SO 3: Explain the effects on the financial statements of choosing each of the inventory
cost determinations methods
• SO 5: Demonstrate the presentation and analysis of inventory
• SO 6: apply the FIFO and average cost inventory cost determination methods under a
periodic inventory system (Appendix 6A)
Determining Inventory Quantities
• Whether companies use a periodic or perpetual system, physical inventory must still be
counted at the end of the period
o To check the accuracy of the perpetual inventory records
o To determine the amount of inventory lost to shrinkage or theft
Taking Inventory
• To ensure inventory is properly counted, companies must have a good system of internal
control
o Employees who perform the count should not have responsibility for custody or
record-keeping
o Counter establishes validity of item
▪ Item exists
▪ Quantity of each item
▪ Condition of each item
Determining Ownership
• Need to consider ownership of goods when taking inventory
• Goods in transit at the end of the period make the determination of ownership more
complicated
o Determine who has legal title to goods in transit
o Include in inventory if company has legal title
• Apply freight/shipping concepts from chapter 5
o FOD shipping point vs FOD destination
• Ownership of consigned goods remains with the owner (the consignor), not the holder of
the goods (the consignee)
• Goods taken home “on approval” by a customer are still owner by the company
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ADM 1340 Full Course Notes
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