1. Inventory Costing – Part 1
Chapter 6
Inventory Costing – Part 1

2. Perpetual vs. Periodic Inventory Accounting
Updates inventory and cost of goods sold after every purchase and sales transaction
Periodic
Delays updating of inventory and cost of goods sold until end of the period
Misstates inventory during the period
This chapter covers the periodic inventory method.

3. DETERMINING INVENTORY QUANTITIES
In order to prepare financial statements, it is necessary to determine the number of units of inventory owned by the company at the statement date, and to value them.
The determination of inventory quantities involves
1. taking a physical inventory of goods on hand, and
2. determining the ownership of goods.
Taking a physical inventory involves counting, weighing, or measuring each kind of inventory on hand.

4. FOB Shipping Point FOB Destination Point
TERMS OF SALE
FOB Shipping Point FOB Destination Point
Seller
Seller
Ownership passes to buyer here Ownership passes to buyer here
Public
Carrier
Co.
Public
Carrier
Co.
Buyer
Buyer

5. TAKING A PHYSICAL INVENTORY
A company, in order to minimize errors in taking the inventory, should adhere to internal control principles by adopting the following procedures:
1. Employees who do not have custodial responsibility for the inventory should do the counting (segregation of duties).
2. Each counter should establish the authenticity of each inventory item (establishment of responsibility).

6. TAKING A PHYSICAL INVENTORY
3. Another employee should make a second count (independent verification).
4. All inventory tags should be pre-numbered and accounted for (documentation procedures).
5. At the end of the count, a designated supervisor should ascertain that all inventory items are tagged and that no items have more than one tag (independent verification).

7. DETERMINING OWNERSHIP OF CONSIGNED GOODS
Under a consignment arrangement, the holder of the goods (called the consignee) does not own the goods.
Ownership remains with the shipper of the goods (consignor) until the goods are actually sold to a customer.
Consigned goods should be included in the consignor’s inventory, not the consignee’s inventory.
Owned by a consignor; do not count in our (consignee) inventory
Consignee Company

8. Only one entry is required to record a sale under a periodic method.
SALES TRANSACTIONS
Only one entry is required to record a sale under a periodic method.

9. RECORDING SALES RETURNS AND ALLOWANCES
The normal balance of Sales Returns and Allowances is a debit. Sales Returns and Allowances is a contra revenue account to the Sales account.

10. PURCHASES OF MERCHANDISE
For purchases on account, Purchases is debited and Accounts Payable is credited. For cash purchases, Purchases is debited and Cash is credited.

11. ACCOUNTING FOR FREIGHT COSTS
When the purchaser directly incurs the freight costs, the account Freight In is debited and Cash is credited.

12. The multi-step income statement under the periodic system requires more detail in the cost of goods sold section, as shown above.