Chapter 6 - Reporting and analyzing inventory. This chapter include objectives: Describe the steps in determining inventory quantities; apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system; explain the effects on the financial statements of choosing each of the inventory cost formulas;. | CHAPTER 6: REPORTING AND ANALYZING INVENTORY LO 1: Describe the steps in determining inventory quantities. LO 2: Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system. LO 3: Explain the effects on the financial statements of choosing each of the inventory cost formulas. LO 4: Identify the effects of inventory errors on the financial statements. LO 5: Demonstrate the presentation and analysis of inventory. LO 6: Apply the FIFO and average cost formulas under a periodic inventory system (Appendix 6A). LEARNING OBJECTIVES Whether companies use a periodic or perpetual system, physical inventory must still be counted at the end of the period: To check the accuracy of the perpetual inventory records To determine the amount of inventory lost to shrinkage or theft Determining Inventory Quantities Need to consider ownership of goods when taking inventory Goods in transit at the end of the period make the determination of ownership more | CHAPTER 6: REPORTING AND ANALYZING INVENTORY LO 1: Describe the steps in determining inventory quantities. LO 2: Apply the cost formulas using specific identification, FIFO, and average cost under a perpetual inventory system. LO 3: Explain the effects on the financial statements of choosing each of the inventory cost formulas. LO 4: Identify the effects of inventory errors on the financial statements. LO 5: Demonstrate the presentation and analysis of inventory. LO 6: Apply the FIFO and average cost formulas under a periodic inventory system (Appendix 6A). LEARNING OBJECTIVES Whether companies use a periodic or perpetual system, physical inventory must still be counted at the end of the period: To check the accuracy of the perpetual inventory records To determine the amount of inventory lost to shrinkage or theft Determining Inventory Quantities Need to consider ownership of goods when taking inventory Goods in transit at the end of the period make the determination of ownership more complicated: Determine who has legal title to goods in transit Include in inventory if company has legal title Determining Ownership Apply freight/shipping concepts from Chapter 5: FOB shipping point versus FOB destination Ownership of consigned goods remains with the owner (the consignor), not the holder of the goods (the consignee) Goods taken home “on approval” by a customer are still owned by the company Determining Ownership (continued) To ensure inventory is properly counted, companies must have a good system of internal control: Internal control systems include control activities; an example of which is review and reconciliation Counting inventory is a good example of a control activity Allows reconciliation to information in company’s inventory system Taking Inventory Once inventory quantities are counted, must apply unit costs to determine total cost of inventory Units of the same inventory can be purchased at different prices Which costs should be used? Inventory Cost .
