Inventory Costing Study Notes

Inventory Costing

Overview

  • Accounting Principles: Tenth Canadian Edition by Weygandt, Kimmel, Mitchell, Warren, Novak.
  • Focus on Inventory Costing.

Learning Objectives

  1. Describe the steps in determining inventory quantities.

Sections

  • Determining inventory quantities
  • Inventory cost determination methods
  • Financial statement effects
  • Inventory errors
  • Presentation and analysis
  • Reporting and analyzing inventory

Determining Inventory Quantities

  • All companies must count their inventory at least once a year.
  • Accurate financial statements require knowledge of both the amount and value of inventory.
Steps Involved
  1. Taking a Physical Inventory
  2. Determining Ownership of Goods

Taking a Physical Inventory

  • Involves counting, weighing, or measuring each kind of inventory on hand.
  • Strong Internal Controls are essential for accuracy:
    • Inventory counts should be performed by employees not normally responsible for inventory management.
    • Verification that counted items exist through direct observation.
    • A second count should be conducted by another employee.
    • Ensure that all items are counted only once; use pre-numbered tags to avoid omissions.

Determining Ownership of Goods

  • Ownership determines who counts the goods as inventory.
  • Control of the goods is transferred to the customer based on:
    • Physical possession of goods.
    • Legal title of goods.
  • Generally, possession coincides with legal title, indicating that control has transferred.
  • Only inventory owned by the company should be included in the financial statements.
Goods in Transit
  • Goods in Transit refer to items on board a public carrier as of the count date.
  • To determine legal ownership of goods in transit, the agreed-upon shipping terms are relevant:
    • FOB Shipping Point: Ownership passes to the buyer when the goods are shipped.
    • FOB Destination: Ownership passes to the buyer when the goods are received.
Terms of Sale - Understanding FOB Points
  • FOB Shipping Point
    • Buyer pays freight costs.
    • Ownership passes to buyer at the seller's location.
  • FOB Destination
    • Seller pays freight costs.
    • Ownership passes to buyer at the buyer's location.

Consigned Goods

  • Consigned Goods: Items being sold that are owned by others.
  • Such goods are to be excluded from the inventory of the consignee (who acts on behalf of the owner, known as the consignor).