BIOM 121 1nd Edition Lecture 8 Outline of Last Lecture I. Exam 1 Study GuideOutline of Current Lecture II. Classifying and Determining InventoryIII. Inventory Costing pt.1Current LectureChapter 6Classifying and Determining InventoryMerchandising Company (sells purchased products)- One classificationo Merchandise inventoryManufacturing Company (makes the products)- Three classificationso Raw materialso Work in progresso Finished goodsDetermining Inventory QuantitiesPhysical Inventory taken for two reasons:- Perpetual systemo Check accuracy of inventory recordso Determine amount of inventory lost due to wasted raw materials, shoplifting, or employee theft- Periodic systemo Determine the inventory on hando Determine the cost of goods sold (COGS) for the periodTaking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand. Taken, - When the business is closed or business is slow- At the end of the accounting periodThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.Determining ownership of goods- Goods in transito Purchased goods not receivedo Sold goods not delivered- Goods in transit should be included in inventory of the company that has legal title to the goods. Legal title is determined by the terms of saleGoods in transit- FOB shipping pointo Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller- FOB destinationo Ownership of the goods remains with the seller until the goods reach the buyerReview Question:Goods in transit should be included in the inventory of the buyer when the:a. Public carrier accepts the goods from the sellerb. Goods reach the buyerc. Terms of sale are FOB destinationd. Terms of sale are FOB shipping pointDetermining ownership of goods- Consigned goodso Hold goods = no change in ownershipo Often = sold for a fee or percentageo Inventory reported with ownership consigned business reports % fee Many car, boat, and antique dealers sell goods on consignmentInventory CostingInventory is accounted for at cost- Cost includes all expenditures necessary to acquire and get ready to sell- Unit costs are applied to quantities to determine the total cost of the inventory and the cost of goods sold using the following costing methods: (cost flow assumptions)o Specific identificationo First in, first out (FIFO)o Last in, first out (LIFO)o Average cost Specific identification- If Crivitz sold the TVs it purchased on Feb 3 and May 22, then its COGS is $1500 ($700+800) and its ending inventory is $750Actual physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory- Practice is relatively rare- Most companies make assumptions (cost flow assumptions) about which units were soldCost flow assumption- Does not need to be consistent with the physical movement of goodsCost Flow AssumptionsFirst-In, First-Out (FIFO)- Oldest/earliest cost >>> out in COGS- Companies determine the cost of the ending inventory by taking the unit cost of the most recent and working backward until all units of inventory have been costed- Another way of thinking about the calculation of FIFO ending inventory is the LISH assumption- last in still hereLast-In, First-Out (LIFO)- Most recent/ last cost >>> goes out into COGS- Another way of thinking about the calculation of LIFO ending inventory is the FISH assumption, first in still hereAverage cost- COG available for sale = apply average cost per unit- Applies weighted-average unit cost to on hand/ end inv/ available COGS (#) to determinecost of the ending inventory- Average cost x #sold = $COGS- Average cost x #EI = $EIReview QuestionIn a period of inflation, the cost flow method that results in the lowest income taxes is the:a. FIFO methodb. LIFO methodc. Average cost methodd. Gross profit