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Inventory Basics

Financial Accounting
Course Code
Liang Chen

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Inventory Basics
¾ Inventory affects both the balance sheet and the income statement
Determining Inventory Quantities
¾ To determine inventory quantities: (1) take a physical inventory of goods on hand,
and (2) determine the ownership of goods
Taking a Physical Inventory
x Actually counting all goods on hand
x Usually done when business is closed or slow
x Internal control is used to minimize errors: the counting should be
done by employees who do not have custodial responsibility for the
inventory; each counter should establish the authenticity of each
inventory item; there should be a second count by another employee;
prenumbered inventory tags should be used; a designated supervisor
should check that all inventory items are tagged and that no items
have more than one tag
x Units costs are then applied to the quantities in order to determine the
total cost of the inventory
Determining ownership of goods
x To make sure that inventory quantities truly belong to the company
x Goods in transit: the shipping details allow the company to decide if
the inventory in transit is their responsibility or the other FRPSDQLH
responsibility. If it is the responsibility is in our company, then the
inventory in transit should be taken into consideration
x Consigned goods: under a consignment arrangement, the holder of the
goods (consignee) does not own the goods. Ownership remains with
the shipper of the goods (consignor). Therefore, the goods should not
be considered for the consignee and should be considered for the
x Other Situations: goods on approval should be added to physical
inventory count while goods held by the seller for alternation should
not be added to physical inventoU\FRXQWERWKIURPWKHVHOOHUV¶ point
of view
Periodic Inventory System
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