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Chapter 6

ACCT NOTES - Chapter #6

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ACCT 2220

Chapter 6: Reporting and Analyzing Inventory Determining Physical Inventory - Whether companies use a periodic or perpetual system, physical inventory must still be counted at the end of the period. - This will identify inventory shrinkage due to theft, spoilage etc. - Internal Control: related methods and measures to help a company achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and operations - Especially important for inventory and cash. - To ensure inventory is properly counted to companies must have good internal control procedures (ex: pre-numbered tags, counting in teams by employees that do not have responsibility for the record keeping or custody of inventory.) Determining Ownership - Goods in transit at the end of the period make determining ownership more difficult - Apply the FOB concepts from Chapter 5: FOB shipping point, FOB destination - The ownership of consigned goods remains with the owner not the holder of the goods. - Goods taken home “on approval” by the customer are still owned by the company. Inventory Cost Determination Methods - Specific identification - Cost formulas: first-in, first-out (FIFO), Average Specific Identification - tracks actual physical flow if goods - Can only be used when actual costs of each inventory item can be determined; where goods are easily distinguishable (not interchangeable), or for goods produced and segregated for specific projects - Used in perpetual inventory systems only. Cost Formulas - FIOF or Average - Order or flow of costs assumed - Can be used in either perpetual or periodic inventory systems. First-in, First-out (FIOF) - Assumes that the first item purchased is the first item sold. - Inventory is recorded at most recent (current) cost. Cost of goods sold is recorded at the oldest inventory cost. - Ending inventory and cost of goods sold under FIFO is the same for perpetual and periodic inventory systems. Average - Under a perpetual inventory system, a new w
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