BIOM 121 1nd Edition Lecture 8 Outline of Last Lecture I Exam 1 Study Guide Outline of Current Lecture II Classifying and Determining Inventory III Inventory Costing pt 1 Current Lecture Chapter 6 Classifying and Determining Inventory Merchandising Company sells purchased products One classification o Merchandise inventory Manufacturing Company makes the products Three classifications o Raw materials o Work in progress o Finished goods Determining Inventory Quantities Physical Inventory taken for two reasons Perpetual system o Check accuracy of inventory records o Determine amount of inventory lost due to wasted raw materials shoplifting or employee theft Periodic system o Determine the inventory on hand o Determine the cost of goods sold COGS for the period Taking 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 period These 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 transit o Purchased goods not received o 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 sale Goods in transit FOB shipping point o Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller FOB destination o Ownership of the goods remains with the seller until the goods reach the buyer Review Question Goods in transit should be included in the inventory of the buyer when the a Public carrier accepts the goods from the seller b Goods reach the buyer c Terms of sale are FOB destination d Terms of sale are FOB shipping point Determining ownership of goods Consigned goods o Hold goods no change in ownership o Often sold for a fee or percentage o Inventory reported with ownership consigned business reports fee Many car boat and antique dealers sell goods on consignment Inventory Costing Inventory 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 identification o 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 750 Actual 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 sold Cost flow assumption Does not need to be consistent with the physical movement of goods Cost Flow Assumptions First 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 here Last 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 here Average cost COG available for sale apply average cost per unit Applies weighted average unit cost to on hand end inv available COGS to determine cost of the ending inventory Average cost x sold COGS Average cost x EI EI Review Question In a period of inflation the cost flow method that results in the lowest income taxes is the a FIFO method b LIFO method c Average cost method d Gross profit method