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
- Goods in transit at the end of the period make determining ownership more
- 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
- Goods taken home “on approval” by the customer are still owned by the
Inventory Cost Determination Methods
- Specific identification
- Cost formulas: first-in, first-out (FIFO), Average
- 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.
- 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