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Chapter 6

ACCT NOTES - Chapter #6 upload.docx

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Department
Accounting
Course Code
ACCT 2220
Professor
b

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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: pre­numbered 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: first­in, first­out (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. First­in, First­out (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 ne
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