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MGAB01H3 (126)
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Chapter 6

Chapter 6 notes

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University of Toronto Scarborough
Financial Accounting
G.Quan Fun

Chapter 6 Reporting and Analyzing Inventory Notes Determining Inventory Quantities N companies that use a perpetual inventory system must still take a physical inventory at year end for two purposes: (1) to check the accuracy of their perpetual inventory records and (2) to determine the amount of inventory lost due to shrinkage and theft N if the physical inventory count does not match what is recorded in the general ledger, then any errors or losses can be determined and an adjusting entry made to correct the inventory balance N in a periodic inventory system, inventory quantities are not updated on a continuous basis N therefore companies must take a physical inventory to determine the inventory on hand at the end of the accounting period N once the ending inventory amount is determined, this amount is then used to calculate the COGS for the period N determining inventory quantities involves two steps: (1) taking a physical inventory of goods on hand and (2) determining the ownership of the goods Taking a Physical Inventory N internal control : the methods and measures adopted within an organization to help it achieve reliable financial reporting, effective and efficient operations, and compliance with relevant laws and regulations N some internal control procedures for counting inventory include the following: 1) The counting should be done by employees who do not have responsibility for the custody or record-keeping of the inventory. 2) Each counter should establish the validity of each inventory item: this means checking that the items actually exist, how many there are of them, and what condition they are in. 3) There should be a second count by another employee or auditor. Counting should take place in teams of two. 4) Prenumbered inventory tags should be used to ensure that all inventory items are counted and that none are counted more than once. Determining Ownership of Goods Goods in Transit N goods in transi
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