Chapter 6 grade 12 accounting

Determining inventory quantities

1. All companies must count their inventory at least once a year

2. The determination of inventory quantities involves;

 • Taking a physical inventory of goods on hand

• Determining the ownership of the goods

• If on board a public carrier

As of the count date, look at FOB point to determine if they should be included

Specific identification

• Tracks the actual physical flow of goods

• Each inventory item is marked with its cost

Cash flow assumptions

• Specific identification not always practical

• A cost flow assumption is used instead:

1. First-in, first-out (FIFO)

2. Average cost

3. Last-in, first-out (LIFO)

• Flow of costs may not match physical flow

First in first out

• Earliest goods purchased are assumed the first sold

• Often reflects the actual physical flow of merchandise

• Costing:

• Costs of earliest goods purchased are first to be recognized as Cost of Goods Sold

• Costs of most recent goods purchased are recognized as ending inventory

Average cost

• Assumes that it is not possible to measure specific physical flow of inventory

• Therefore better to use an average price

• Allocation of cost of goods available for sale is based on weighted average unit cost

• This is then applied:

• to units sold to determine cost of goods sold

• to units on hand to determine ending inventory

Last in first out

• Latest goods purchased assumed to be first sold

• Seldom coincides with actual physical flow of inventory

• Costing:

• Costs of earliest goods purchasedm remain in ending inventory

• Costs of most recent goods purchased are first to be recognized as Cost of Goods Sold

• Recent changes prohibit its use in Canada