WEEK 3
CHAPTER 6 - INVENTORIES
6.1 - Classifying and determining inventory
In a merchandising company
-> inventory consists of different items e.g. in a grocery store it is canned
goods, dairy, meats etc
Characteristics in common:
– Owned by the company
– In a form ready for sale to customers in the ordinary course of business
= merchandise inventory
In a manufacturing company
-> three inventory categories
. Raw materials = basic goods that will be used in production but not yet
place into production
3 . Work in process = portion of manufactured inventory that is in
production process but not yet complete
2 . Finished goods inventory = manufactured items that are completed and
ready for sale
1
By observing the levels and changes in the levels of these three inventory
types, financial statement users can gain insight into management’s
production plans
● Low levels of raw materials and high of finished goods -> management
believes it has enough inventory on hand and production will be slowing
down (perhaps in anticipation of a recession)
● High levels of raw materials and low of finished goods -> signal that
management is planning to step up production
JIT inventory method = companies manufacture or purchase goods only
when needed
– Can significantly lower inventory levels and costs using
Determining inventory quantities
-> if using a perpetual system, companies take the physical inventory for
, 2
1
two reasons:
. To check the accuracy of their perpetual inventory records
. To determine the amount of inventory lost due to waste raw
materials, shoplifting or employee theft
-> if using the period inventory system, companies take the physical
inventory for two purposes:
. To determine the inventory on hand at the statement of financial
position date
. To determine the cost of goods sold for the period
Determining inventory involves two steps:
(1) Taking a physical inventory of goods on hand
● Taken at the end of the accounting period
● Involves actually counting, weighing or measuring each kind of inventory
on hand
● More accurate when goods are not being sold or received during counting
-> so companies “take inventory” when the business is closed or slow
(2) Determining the ownership of goods
● Means determining what inventory a company owns
● Two questions must be answered:
○ Do all of the goods included in the count belong to the company?
○ Does the company own any goods not included in the count?
Goods in transit -> on board a truck, train, ship or plane - purchased goods
not yet received or sold goods not yet delivered
– Complicated
Goods in transit should be included in the inventory of the company that has
legal title to the goods -> determined by the terms of sale:
. FOB (free on board) shipping point -> ownership of the goods passes to
the buyer when the public carrier accepts the goods from the seller
. FOB destination -> ownership of goods remains with the seller until the
goods reach the buyer
CHAPTER 6 - INVENTORIES
6.1 - Classifying and determining inventory
In a merchandising company
-> inventory consists of different items e.g. in a grocery store it is canned
goods, dairy, meats etc
Characteristics in common:
– Owned by the company
– In a form ready for sale to customers in the ordinary course of business
= merchandise inventory
In a manufacturing company
-> three inventory categories
. Raw materials = basic goods that will be used in production but not yet
place into production
3 . Work in process = portion of manufactured inventory that is in
production process but not yet complete
2 . Finished goods inventory = manufactured items that are completed and
ready for sale
1
By observing the levels and changes in the levels of these three inventory
types, financial statement users can gain insight into management’s
production plans
● Low levels of raw materials and high of finished goods -> management
believes it has enough inventory on hand and production will be slowing
down (perhaps in anticipation of a recession)
● High levels of raw materials and low of finished goods -> signal that
management is planning to step up production
JIT inventory method = companies manufacture or purchase goods only
when needed
– Can significantly lower inventory levels and costs using
Determining inventory quantities
-> if using a perpetual system, companies take the physical inventory for
, 2
1
two reasons:
. To check the accuracy of their perpetual inventory records
. To determine the amount of inventory lost due to waste raw
materials, shoplifting or employee theft
-> if using the period inventory system, companies take the physical
inventory for two purposes:
. To determine the inventory on hand at the statement of financial
position date
. To determine the cost of goods sold for the period
Determining inventory involves two steps:
(1) Taking a physical inventory of goods on hand
● Taken at the end of the accounting period
● Involves actually counting, weighing or measuring each kind of inventory
on hand
● More accurate when goods are not being sold or received during counting
-> so companies “take inventory” when the business is closed or slow
(2) Determining the ownership of goods
● Means determining what inventory a company owns
● Two questions must be answered:
○ Do all of the goods included in the count belong to the company?
○ Does the company own any goods not included in the count?
Goods in transit -> on board a truck, train, ship or plane - purchased goods
not yet received or sold goods not yet delivered
– Complicated
Goods in transit should be included in the inventory of the company that has
legal title to the goods -> determined by the terms of sale:
. FOB (free on board) shipping point -> ownership of the goods passes to
the buyer when the public carrier accepts the goods from the seller
. FOB destination -> ownership of goods remains with the seller until the
goods reach the buyer
