Professional Documents
Culture Documents
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LEARNING OBJECTIVES
By the end of this lecture, learners will be able to:
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Determining Inventory Quantities
Why do we need to determine inventory quantities?
Physical inventory must be matched with accounting records at the end of the period for two
reasons:
• To ensure accuracy of perpetual inventory records.
• To ensure accuracy of physical inventory lost to shrinkage or theft
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Taking Inventory
• Taking a physical inventory involves counting, weighing, or measuring each kind of
inventory on hand.
• To ensure inventory is properly counted, companies must have a good system of internal
control:
• Internal control systems include control activities; an example of which is review and
reconciliation
• Counting physical inventory and reconciling that with accounting records.
• Taking physical inventory is a formidable task, hence companies often count inventory
when the business is slow or when it is not open.
• Examples: Dollarama, Lululemon,
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Taking Physical Inventory
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Determining Ownership of Goods
After counting physical inventory, accountants should consider the following two types of
inventory in determining ownership of goods:
1. Goods in Transit (usually not counted in physical inventory, but we may own them).
2. Consigned goods (usually counted in physical inventory, but we may not own them).
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Determining Ownership of Goods
Goods in Transit
• Goods in transit should be included in the inventory of the company that has legal title to the
goods
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Determining Ownership of Goods
Goods in Transit – Quick Example
• Physical inventory count of Crowchild dealership shows five vehicles.
• Eight vehicles that Crowchild dealership purchased last week (FOB shipping) are in
transit.
Determine the total number of vehicles that their accounting records should show?
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Determining Ownership of Goods
Consigned Goods
• In some lines of business, it is customary to hold goods belonging to other parties and sell them,
for a fee, without ever taking ownership of the goods. These are called consigned goods (e.g.
paintings, jewelry, and vehicle dealerships).
• Ownership of consigned goods remains with the owner (the consignor), not the holder of the
goods (the consignee).
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Determining Ownership of Goods
Consigned Goods – Quick Example
• Physical inventory count of Bauer’s dealership shows fifteen vehicles.
• Three previously owned vehicles are held on consignment for loyal clients.
Determine the total number of vehicles that their accounting records should show?
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Summary of Determining Inventory Quantities
1. Take Physical Inventory by counting it
2. Determine ownership of goods by:
Applying the rules of ownership to goods in transit:
• FOB destination: Goods belong to the seller until they reach their destination.
• FOB shipping point: Goods belong to the buyer after they have been shipped.
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Exercise 6-1
Physical inventory count of LaSalle Fashion House Corporation is $400,000 on August 31. How will the following
additional information affect the inventory count and cost? (5 minutes)
• Goods costing $30,000 held on consignment for McQueen Dress Inc. were included in the inventory.
• Purchase of $20,000 goods were in transit from Montreal at August 31 (terms FOB shipping point). This
shipment was not included in the count.
• LaSalle's purchase of $18,000 in goods from Deleau Ltd. was in transit from Winnipeg on August 31 (terms
FOB destination) and was not included in the count.
• LaSalle sold inventory for $36,000 that cost $24,000 when purchased. The items were in transit to a customer
in Vancouver as at August 31 (terms FOB destination) and were not included in the count.
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Applying Cost Formulas Under
a Perpetual Inventory System
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Introduction to Cost Formulas
• Physical count in inventory determination involves quantities.
• Companies must apply unit costs to the quantities to determine the total cost of the
inventory.
• Three different cost formulas that can be used under IFRS and ASPE to determine
inventory cost.
S p e c i fi c I d e n ti fi c a ti o n First-in; First-out (FIFO) Average Cost
How to choose inventory cost formula?
• Choose a formula that
• Represents as closely as possible physical flow of goods
• Reports ending inventory at recent cost
• Other rules
• Use the same formula for inventories of similar nature and usage
• Once you pick a formula, you must stick with it
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Summary of Advantages and Financial Statement
Effects of Each Cost Formula
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Specific Identification
• Tracks physical flow of goods
• Used in perpetual system only
• Can only be used where actual costs of each item can be determined; goods are easily
distinguishable (not easily interchangeable) or for goods produced and segregated for
specific projects.
• You don’t need to prepare inventory schedule to compute cost because each item can be
uniquely identified and its cost is uniquely allocated
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Example of Specific Identification
Inventory
Debit Credit
Opening 165,000 60,000
60,000
130,000
Bal 295,000
165,000
225,000
355,000
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Ability of Cost Formulas to Track Physical Flow
• Specific identification tracks the actual flow of the goods
• Other two cost formulas assume a flow of costs that may not be the same as the actual flow
of goods
• FIFO (First-in, first-out) - Cost of first item purchased is cost of first item sold.
• Average Cost - Cost is determined using a moving (weighted) average of the cost of the items
purchased
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First-in, First-out (FIFO)
• The cost of (oldest) goods purchased is recognized first in cost of goods sold.
• This does not necessarily mean that the oldest units are in fact sold first.
• The order in which goods are purchased is important to track.
• Because cost of oldest items is recognized first, inventory account shows current cost in
the current assets section of balance sheet.
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Example of FIFO
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Average Cost
• Used when goods are homogeneous or interchangeable and cannot be distinguished from
one another.
• The cost of goods sold and cost of ending inventory is determined by weighted average
unit cost formula.
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Example of Average Cost
Inventory
Debit Credit
Opening 1,000 1,600
2,200 4,622
3,600
5,200
Bal 5,778
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Exercise 6-2
Akshay Limited uses the FIFO cost formula in a perpetual inventory system. Fill in the missing
amounts for cells with question marks in the following perpetual inventory schedule:
(5 minutes)
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Exercise 6-3
Akshay Limited uses the average cost formula in a perpetual inventory system. Fill in the missing
amounts for cells with question marks in the following perpetual inventory schedule (Round
numbers to the nearest cent for presentation purposes).
• Hint: Cost of Goods Available for Sale ÷ Units Available for Sale = Weighted Average Unit Cost
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