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Inventories: Measurement

Date

End of year Inventory

Account

Debit Ending inventory

Credit

Income summary To record ending inventory in general ledger inventory account.

Ending inventory

Both the debit and credit are entered in the income summary account because we need both amounts in order to prepare a multi-step income statement. The debit and credit balances in the income summary account combined with the temporary expense accounts result in the computation of cost of goods sold as reported in the income statement at year-end. In the income summary account the debit reflects beginning inventory and the credit reflects ending inventory.

PHYSICAL QUANTITIES INCLUDED IN INVENTORY

  • Goods in Transit

The “passage of title” is the key to determining whether goods in transit are part of ending inventory. ¾ f.o.b. destination The title to the goods transfers when received by the buyer. Therefore, goods in transit year-end should be reported in the ending inventory of the seller. ¾ f.o.b. shipping point The title to the goods transfers when the seller delivers the goods to a common carrier. Goods in transit at year-end shipped f.o.b. shipping point should be included in the ending inventory of the buyer.

  • Consigned Goods

The consignor is the seller of the merchandise who ships the goods on consignment to the consignee. The consignee is just an agent in the selling process and does not actually own the goods. Therefore, at year-end the consignor (seller) should include the consigned goods in its inventory even though it may still be in the physical possession of the consignee.

  • Sales Returns and Allowances

When returns and allowances are material the company must estimate an allowance to the amounts reflected in the balance sheet and income statement at year end. In preparing the adjusting journal entry for this allowance the amount of anticipated inventory that will be returned after year end is included in the ending inventory in the balance sheet.

EXPENDITURES INCLUDED IN INVENTORY

Product Costs Product costs are all of the costs required to obtain inventory and are included in the ending inventory and/or the cost of goods sold. They include

  • Direct cost of the product

  • Freight-in

  • Other direct costs of acquisition

F:\Teaching\3321\web\module4\c8\tnotes\c8a.doc

3/12/2007

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