1. Determining Inventory
Chapter 6
Determining Inventory

2. Terms Consigned Goods Consistency Principle Days in Inventory
Finished Goods
FIFO
FOB Destination
FOB Shipping Point
Inventory Turnover
JIT Inventory
LIFO
LCM
Raw Materials
Specific Identification
Weighted Average Unit Cost
Work in Process

3. Inventory
Determining Inventory
Physical Count
Who Owns It

4. Physical Count
Even with a system of recording purchases and sales at the point of the event, companies do a physical count at the end of their accounting period.
Stores close or take inventory at night
Companies often hire temporary workers to take inventory.
Think about how many items in Target or Meijer, each has to be counted or weighed

5. Who Owns It ? Goods in Transit
FOB Shipping Point
Ownership passes to buyer when it gets on the delivery vehicle, car, truck, bus, airplane, etc.
FOB Destination
Ownership passes to buyer when delivered and accepted by the buyer.

6. Consignment Goods that an owner sells through a dealer
Ownership belongs to the seller

7. Inventory Costing Four GAAP methods of costing inventory
Specific Identification
FIFO (First In First Out)
LIFO (Last In Last Out)
Average Cost

8. Three Areas of Concentration
What is available for sale
Beg inventory + Purchses
What was sold?
What is the cost of the goods sold using the one of the 4 inventory methods.
What is the value of the ending inventory?
Beg + Purchases – sold items.

9. Problem ATA Warehouse Jan 2 purchased 100 TV’s @$450 45,000
Feb 2 purchased ,500
Mar 1 purchased ,000
Jun 5 purchased ,125
Total Available: (325) , 625
June 30 prepared semi-annual financial statements. They sold 250 TV’s. What is their ending inventory and what are the C of G?

10. Specific Identification
We can track that 100 TV’s came from Jan 2 50 came from Feb 2 and 50 came from Mar 1 and 50 came from Jun 5 So Cost of Goods are: , , , ,750 Total C of G 117,500 Ending Inventory (153, ,500) = $36,125

11. FIFO FIRST IN-FIRST OUT
Jan 1, 450 $45,000
Feb 2, 47,500
Mar 2, ,000
COST OF GOODS SOLD $116,500
ENDING INVENTORY (153, ,500) $37,125

12. LIFO LAST IN- LAST OUT Jun 5, 75 @ $495 $37,125 Mar 1, 50 @480 24,000
Feb 2, 47,500
Jan 2, ,250
COST OF GOODS SOLD $119,875
ENDING INVENTORY (153, ,875) $ 33,750

13. AVERAGE
$153,625/325 = $ EACH
C OF G.S. = $118,172.50
ENDING INVENTORY ,172.50=$35,452.50*
*NEED TO ROUND TO MAKE AMOUNT EVEN

14. COMPARE WHICH SHOULD ATA PICK?
METHOD
COST OF GOODS SOLD
ENDING INVENTORY
SPECIFIC IDENTIFICATION
$117,500
$ 36, 125
FIFO
$116,500
$ 37,125
LIFO
$119,875
$33,750
AVERAGE $
$35,452.50

15. ANOTHER METHOD LCM
For goods that have high fluctuations in price, IRS allows the Lower of Cost or Market to determine inventory costs:
Example: Our flat screen TV’s have dropped in price over the last three 3 months therefore we can take lower of cost of market
Our Cost was $153,625
The Market price has dropped 10%

16. Financial Analysis Inventory Turnover
Stakeholders want to know how much inventory is left in the warehouse which may mean the company is either purchasing two much or their sales are down.
Formula is:
Cost of Goods Sold/Beg Inventory+End Inv
(2)

17. Your Problem
Walmart reported in its 2008 annual report a beginning inventory of $33,685 million, and ending inventory of $35,180 million, and cost of goods sold for the year ended January 31 of $286,515 million. What is their inventory turnover ratio?

18. Test Review Know 6 definitions Know LIFO, FIFO, WA
Know how to determine inventory using the above methods
Know how to determine C of GS
Know why companies use different methods