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Lecture 6

ADM 1340 Lecture Notes - Lecture 6: Perpetual Inventory, Consignor, Consignee


Department
Administration
Course Code
ADM 1340
Professor
Lamia Chourou
Lecture
6

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ADM1340, CHAPTER 6: REPORTING AND ANALYZING INVENTORY
Learning Objectives
1. Describe the steps in determining inventory quantities.
2. Apply the methods of cost determination.
3. Explain the financial statement effects of the inventory cost determination methods.
4. Demonstrate the presentation and analysis of inventory.
Determining Inventory Quantities
1. Taking a physical inventory of goods on hand.
All companies need to determine quantity of inventory at the end of each
accounting period.
For companies using the perpetual inventory system
For companies using the periodic inventory system
Involves actually counting, weighing, or measuring each kind of inventory on
hand.
A good system of internal control minimizes errors in counting inventory.
2. Determining ownership of goods Goods in transit:
should be included in the inventory of the company that has legal title to the
goods on the date of count.
Determining Inventory Quantities Consigned goods:

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The consignee sells the goods on behalf of the consignor in exchange for a fee without
ever transferring legal title or ownership.
Consigned goods are counted in the inventory of the consignor (owner) rather than the
consignee.
Methods of Cost Determination Cont’d.
Methods:
1. Specific identification method.
2. Cost formula methods:
– First-in first-out (FIFO)
Average cost.
Methods of Cost Determination Cont’d.
1. Specific identification method:
Used when goods are not ordinarily interchangeable.
Tracks the actual physical flow of goods.
It reports ending inventory at its actual cost.
Normally only used in a perpetual inventory system.
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2. Cost formula methods:
Assume a flow of costs that may not be the same as the actual flow of goods.
Two methods under IFRS:
oFIFO
oAverage cost
First-in, first-out (FIFO)
assumes that the earliest goods purchased are the first to be sold and recognized as cost of
goods sold.
can be used in perpetual and periodic systems
The results under FIFO in a perpetual system are the same as in a periodic system.
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