ACC 2101 Lecture Notes - Lecture 6: Perpetual Inventory, Regional Policy Of The European Union, Finished Good
Michael Ding
10/24/16
Chapter 6 Review
Learning Objective 1: Discuss how to classify and determine inventory
Classifying Inventory:
• Merchandising Company – Goods are owned by the company and in a form ready for
sale to customers in the ordinary course of business.
o Merchandise Inventory – Describes the many different items that make up the
total inventory
• Manufacturing Inventory – Classified into three categories
o Finished Goods – Goods ready for sale
o Work in Process – Portion of manufactured inventory that has begun the
production process but is not yet complete
o Raw Material – Basic goods that will be used in production but have not yet been
placed into production
• Just in time Method – companies manufacture or purchase goods only when needed
Determining Inventory Quantities:
• Perpetual system to determine physical inventory.
o One reason is to check the accuracy of their perpetual inventory records
o Second reason is to determine the amount of inventory lost due to wasted raw
material, shoplifting or employee theft
• Period Inventory System takes physical inventory
o Determine the inventory on hand at the balance sheet date
o Determine the cost of goods sold for the period
• Taking a physical Inventory – Involves counting and weighing or measuring each kind of
inventory on hand.
Determining Ownership of Goods:
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• Goods in Transit – Company may have purchased goods that have not yet been received
or sold goods that have not yet been delivered.
• FOB (Free on Board) Shipping – Ownership of the goods passes to the buyer when the
public carrier accepts the goods from the seller.
• FOB Destination – Ownership of the goods remain with seller until the goods reach the
buyer.
• Consigned Goods – Holding of the good of other parties and try to sell the goods for
them for a fee but without taking ownership of the good.
Learning Objective 2: Apply inventory cost flow methods and discuss their financial effects
• Inventory is accounted for at cost
o Cost includes all expenditures necessary to acquire goods and place them for
sale
Specific Identification:
• Definition – Identify which particular units it sold and which are still in ending inventory
• Requires companies keep records of the original cost of each individual inventory item
• Disadvantage is that management can manipulate net income by selling unit at low cost
or selling unit at high cost
Cost Flow Assumptions:
• LIFO (Last in First Out)
• FIFO (First In First Out)
• Assumed Cost – A perpetual system to record cost of goods sold at the time of sale.
Recalculates cost of goods sold using periodic FIFO, LIFO or average-cost at the end of
the period.
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• FIFO – Assumes that the earliest goods purchased are the first to be sold.
o Cost of earliest goods purchased are the first to be recognized in determine cost
of goods sold.
o FIFO Goods recognized from oldest first
o Companies determine the cost of the ending inventory by taking the unit cost of
the most recent purchase and working backward until all units of inventory have
been costed.
• LIFO (Last in, First Out) – Assumes that the latest gods purchased are the first to be sold.
o Cost of the latest goods purchased are the first to be recognized in determining
cost of goods sold.
o LIFO goods from latest first
find more resources at oneclass.com
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Document Summary
Learning objective 1: discuss how to classify and determine inventory. Just in time method companies manufacture or purchase goods only when needed. Learning objective 2: apply inventory cost flow methods and discuss their financial effects. Inventory is accounted for at cost: cost includes all expenditures necessary to acquire goods and place them for sale. Cost flow assumptions: lifo (last in first out, fifo (first in first out, assumed cost a perpetual system to record cost of goods sold at the time of sale. Average cost: definition allocates the cost of goods available for sale on the basis of weighted average unit cost incurred, weighted average unit cost is used to determine the cost of the ending inventory. Financial statements and tax effects of cost flow methods: three cash flow methods, lifo, fifo, average cost. If prices are falling, the results from the use of fifo and lifo are reversed.
