At the end of an accounting period, companies need to determine the quantity of inventory they own as of that date. Usually, this is a two- step process: •1) taking a physical count of inventories; and •2) determining the ownership of goods.

When companies take a physical count, they actually count, weigh or measure each kind and item of inventory they have on hand.

•Goods in transit are goods that are en route to the company ( purchases) or en route to a customer ( sales).

• The ownership of goods is determined by the terms of sale, i. e., FOB destination or FOB shipping point.

FOB shipping point

• if a company in Ankara purchases goods from a company in Trabzon, it would own the goods on the truck to Ankara on the day of the physical count

FOB destination

• The company in Trabzon owns the goods until they reach Ankara, and therefore these goods must not be included in the inventory of the company in Ankara

Consignment

• A marketing arrangement between the consignor ( the owner of the goods) and the consignee ( the holder of the goods).

Consignment

• The consignee sells the goods on behalf of the consignor, thereby earning a commission from the sale. Since the consignee does not own the merchandise, she should not include it in her inventory. However, the consignor should include these goods in her inventory.

Example: Momentus Corp.

• Momentus Corp. is a wholesale distributor of TV sets and has already completed the physical count of the goods stored in its warehouse and showroom on 31 December 2014.

Example: Momentus Corp.

• a. The total quantity of TV sets counted physically on company premises on 31 December 2014 was 250 units.

Example: Momentus Corp.

• b. There were 15 units of goods that were shipped to Fins Company FOB destination on 29 December 2014 and were still in transit at year- end.

Example: Momentus Corp.

• c. Momentus imported 20 TV sets from a manufacturer in Japan with the term FOB shipping point on 15 December 2014, and the expected time of arrival of the goods is 10 January 2015.

Example: Momentus Corp.

• d. Included in the counted TV sets were 21 units that were held on consignment from another company.

Example: Momentus Corp.

• e. Momentus Corp. held a total of 50 TV sets at various showrooms on consignment. Since these sets were not in the warehouse of Momentus during the physical count, they were not included in the quantity of physical inventory.

Example: Momentus Corp.

What is the correct number of TV sets that Momentus Corp. owns, as of 31 December 2014?

• The quantity of inventory establishes the basis for determining the inventory’s value as reported in the fi nancial statements, and therefore the identifi cation of physical inventory is crucial to a fair presentation of the fi nancial position of any company.

• This method can be used when the actual cost of an item is traceable.

• let’s assume that Kompucomp Ticaret sells computers with specifi c features. During the period, the company buys three computers with the same specifi cations at costs of TL 700, TL 800 and TL 1.000, respectively, and sells two of them.

• At year end, the company determines that the computer which cost TL 800 is still on hand. Accordingly, the Ending Inventory is TL 800, and the Cost of Goods Sold is TL 1.700 ( TL 700 + TL 1.000).

• The First- in First- out ( FIFO) and Weighted Average methods assume that the flow of costs may be unrelated to the physical flow of goods.

• Net realizable value ( NRV) of inventory is the net amount ( expected sales price less costs to sell) that a company expects to receive from the sale of these inventories in the future.

In order not to overstate the statement of financial position amount, IFRS specifies that companies shall measure inventories on the lower- of- cost- or net realizable value basis.