Merchandise Inventory

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Merchandise Inventory
AGRICULTURAL TECHNICAL INSTITUTEBUS TEC T101
ACCOUNTING

• Chapter 6

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PART 2 REVIEW
CHAPTER 7 SPECIAL JOURNALS
I. Purchases Journal A. Daily 1. Record
Purchases 2. Post in Ind Accts
in AP Sub Ledger B. End of Month 1. Post
Cr to Act Payable in Gen Ledger
2. Post Db to Inventory in Gen
Ledger 3. Post Db to Supplies in
Gen Ledger 4. Post Db to Other Accts
in Gen Ledger
I. Cash Payments Journal A. Daily 1.
Record Money Paid 2. Post in Ind Accts
in Acct Pay Sub Ledger B. EOM Post to
Gen Ledger 1. Post Db to Acct Payable 2.
Post Db to Other Accts 3. Post Cr to Cash
4. Post Cr to Inventory
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ACCOUNTING CONCEPTS

• CH 1 ACCT THE BUS ENVIRONMENT
• CH 2 RECORDING TRANSACTIONS
• CH 3 THE ADJUSTING PROCESS
• CH 4 COMPLETING THE ACCOUNTING CYCLE
• CH 5 MERCHANDISE OPERATIONS
• CH 7 SPECIAL JOURNALS
• CH 6 MERCHANDISE INVENTORY
• CH 8 INTERNAL CONTROL CASH
• CH 9 RECEIVABLES
• CH 10 PLANT ASSETS INTANGIBLES
• CH 11 CURRENT LIABILITIES PAYROLL
• CH 17 STATEMENT OF CASH FLOWS
• ADDITIONAL INCOME TAX

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LEARNING OBJECTIVES
CH 6 MERCHANDISE INVENTORY

• AFTER COMPLETING THIS LESSON, THE STUDENT SHOULD
  BE ABLE TO

1a. Acct for inv with the perpetual system
1b. Acct for inv with the periodic system
1c. Compare perpetual and periodic systems
2. Apply inventory costing methods
3. Apply accounting principles to inventory
4. Apply lower-of-cost-or-market rule to Inv
5. Assess impact of inventory errors
6. Use Gross Profit Method to Estimate Inv
5
Inventory Systems
CH 6 MERCHANDISE INVENTORY
Keeps a running record of goods
Perpetual
Physical count at least once a yr
Used for expensive items/all
Autos, Jewelry, Furniture
Not a running record of goods
Periodic
Physical count at least once a yr
Used for inexpensive items
Groceries, Office Supplies, Dept Stores
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Acct for inventory by the perpetual system
1a
OBJ
A. PURCHASE OF INVENTORY
Debit Inventory 560,000 Credit Cash or
Accts Payable 560,000 Record the purchase of
inventory _at_ wholesale
A ?
B1. RETAIL VALUE OF SALE OF INVENTORY
Debit Cash or Accts Rec 900,000 Credit Sales Rev
900,000
B2. WHOLESALE COST OF RETAIL OF SALE
B ?
Debit Cost of Goods Sold 540,000 Credit
Inventory 540,000 To record w/s cost
of goods sold at retail
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Cost of Goods Sold
Acct For Inventory By The Perpetual System
1a
OBJ
Beginning Inventory 100,000

• Wholesale Cost 600,000
• Freight In
• Purchase Returns -25,000
• -Purchase Allowance 5,000
• Purchase Discounts -10,000

• Sales
• Sales Returns
• -Sales Allowance
• Sales Discounts
• Net Sales

Net Purchases 560,000
lt A
Goods Available for Sale 660,000
- Ending Inventory 120,000 (How is this
determined
Cost of Goods Sold 540,000
lt B
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Units Purchased in 200X
249
Apply Inventory Costing Methods
2
OBJ
Jan 1 Beg 10 units _at_ 10 100 May 19 Pur
25 units _at_ 14 350 Oct 23 Pur 25 units _at_
31 450 Units Avail 60 900 Units
sold -40 gt COGS? Units left 20 gt
Inventory?
Value of the Units Sold (i.e, COGS) ??????
Value of the Units Unsold (i.e, End Inv) ??????
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Computing the Cost of Inventory
Apply Inventory Costing Methods
249
1a
OBJ
Cost of inventory on hand Quantity unit cost
Four Inventory Costing Methods
1. Specific Unit Cost
a. Used where each item has a different cost
b. Auto, jewelry, furniture, real estate
c. Used by very few companies
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Specific-Unit-Cost Method
Apply Inventory Costing Methods
250
2
OBJ
Value of each item is tracked by serial or stock
no.
- Sales
Price
Rev
Cost
Cost
Beg Inv
Ford
Ford
15000
18000
15000
18000
Buick
Chevy
18000
22000
16000
17000
BMW
35000
16000
18000
55000
Chevy
12000
10000
Kia
COGS
78000
Purchases
Price
Pontiac
End Inv
Cost
20000
24000
Buick
BMW
18000
35000
50000
22000
Pontiac
20000
24000
12000
15000
Kia
38000
End Inv
116000
Avail 4 Sale
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Acct for inventory by the perpetual system
249
1a
OBJ
Four Inventory Costing Methods
2. Average Cost
a. COGS is based on ave cost for the period
b. Compute new ave cost after each purchase
c. Generates gross profits, income tax, and net
income amount between the extremes of FIFO LIFO
d. Middle ground approach
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Average-Cost Method
253
Apply Inventory Costing Methods
2
OBJ
10 Units _at_ 10 (Beg) 100
25 Units _at_ 14 350
25 Units _at_ 18 450
900
15 /unit
60 Units Avail 4 Sale
/60
Cost of goods sold 40 15 600
Ending inventory 20 15 300
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Average-Cost Method
253
Apply Inventory Costing Methods
2
OBJ
1
40
40
5
6
45
270
7
310
44.29
15
4
44.29
177
3
44.29
133
26
7
50
350
10
483
48.30
30
8
48.30
386
2
48.30
97
Purchase Entries
Sales Entries _at_ 80 each
Inventory
Acct Rec
270
320
Acct Pay
Acct Pay
270
320
Inventory
COGS
350
177
Acct Pay
Inventory
350
177
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Acct for inventory by the perpetual system
249
1a
OBJ
Four Inventory Costing Methods
3. First In First Out
a. Ending Inventory based most recent purchases
b. First Items In are the first to be sold
c. COGS based oldest purchases
d. Consistent with physical movement of Inventory
for most companies.
d. Produces lowest COGS and highest profit
attract investors borrow on good terms
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FIFO First-In, First-Out
250
Apply inventory costing methods
2
OBJ
Avail 4 Sale 60 units
Sales 40 units starting with oldest
Beg 10 _at_ 10 100 Pur 25 _at_ 14 350 Pur
25 _at_ 18 450 Units Avail 60 900 Units
sold -40 Units left 20
1st 10 _at_ 10 100
2nd 25 _at_ 14 350
3rd 5 _at_ 18 90
COGS 40 units 540
End Inv 20 units Most Recent
End Inv 20 units_at_18 360
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First In First Out
251
Apply Inventory Costing Methods
2
OBJ
6
45
270
1
40
40
5
6
45
270
1
40
40
15
3
45
135
3
45
135
26
7
50
350
7
50
350
30
3
45
135
5
50
250
2
50
100
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Acct for inventory by the perpetual system
252
1a
OBJ
Four Inventory Costing Methods
4. Last In First Out
1. Last Items In are the first to be sold
2. COGS based most recent purchases
3. Ending Inventory based earliest purchases
4. Results in highest COGS and lowest net profit

5. Lower net profits means less income tax but is
not attractive to investors or bankers
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D. LIFO Last-In, First-Out
252
Apply inventory costing methods
2
OBJ
Avail 4 Sale 60 units
Sales 40 units starting with most recent
Beg 10 _at_ 10 100 Pur 25 _at_ 14 350 Pur
25 _at_ 18 450 Units Avail 60 900 Units
sold -40 Units left 20
1st 25 _at_ 18 450
2nd 15 _at_ 14 210
COGS 40 units 660
End Inv 20 units Earliest
1st 10 _at_ 10 100
2nd 10 _at_ 14 140
End Inv 20 units 260
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Last In First Out Method
Apply Inventory Costing Methods
252
2
OBJ
6
45
270
6
45
270
5
4
45
180
1
40
40
15
2
45
90
26
7
50
350
1
40
40
2
45
90
7
50
350
30
7
50
350
1
40
40
1
45
45
1
45
45
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Comparison of Methods
Apply inventory costing methods
254
2
OBJ
When Prices are Increasing
FIFO
Wtd Ave
LIFO
Lowest End Invent
Highest End Invent
Middle
Highest COGS
Lowest COGS
Middle
Lowest Gross Profits
Highest Gross Profits
Middle
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Use of Inventory Costing Methods
Apply inventory costing methods
254
2
OBJ
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Periodic System
Acct For Inventory By The Periodic System
1b
OBJ
a. Periodic systems do not keep a continuous
record of inventory on hand.

• b. At the end of the period, make a physical
  count and apply unit cost to determine ending
  inventory.
• c. Inventory purchases are debited to the
  purchases account.
• d. The inventory account carries the beginning
  inventory balance until adjusted at period end.

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Comparison of perpetual periodic system
278
1c
OBJ
Perpetual
Periodic
1. Purchase of Inventory on account
Inventory 560,000
Purchases 560,000
Acct Pay 560,000
Acct Pay 560,000
2. Sale of Inventory on account
Acct Rec 900,000
Acct Rec 900,000
Sales Rev 900,000
Sales Rev 900,000
COGS 540,000
Inventory 540,000
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Comparison of perpetual periodic system
1c
278
OBJ
Perpetual
Periodic
3. Inventory COGS
Inventory
Inventory
100,000
Beg
-540,000
COGS
100,000
Beg
100,000
Tran
560,000
Pur
120,000
End
660,000
A4S
120,000
End
Cost of Goods Sold
Cost of Gd Sold
540,000
100,000
120,000
End
Beg
560,000
Net Pur
540,000
4. End of Period Entries for Inv COGS
None Required Inventory COGS are up-to-date
See Next Slide
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Comparison of perpetual periodic system
1c
278
OBJ
Perpetual
Periodic
4. End of Period Entries for Inv COGS
COGS 100,000
None Required Inventory COGS are up-to-date
Inventory 100,000
Transfer Beg Inv to COGS
Inventory 120,000
COGS 120,000
Record Ending Inventory per physical count
COGS 100,000
Purchases 100,000
Transfer Purchases to COGS
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Comparison of perpetual periodic system
1c
278
OBJ
Perpetual
Periodic
5. Income Statement
Net Sales Rev 900,000 Cost Of Goods Sold
Beg Inv 100,000 Net Purch
560,000 Avail 4 Sale 660,000 Less End
Inv -120,000 COGS 540,000Gross
Profit 360,000
Net Sales Rev 900,000 COGS
540,000 Gross Profit 360,000
6. Balance Sheet
Current Assets Cash Accounts Receivable
Inventory 120,000 Prepaid Assets
6. Balance Sheet
Same
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Perpetual System FIFO Example
Apply inventory costing methods
251
2
OBJ
Item Teva Sandals Received
Sold Balance on Hand Unit
Unit Unit Date Qty. Cost Total Qty.
Cost Total Qty. Cost Total Nov.
1 10 30 300
5 6 30 180 4 30 120
7 25 31 775 4
30 120 25 31
775 12 4 30
120 9 31 279 16
31 496
Nov. 26 25 32 800 16 31 496
25 32 800
30 16 31 496
5 32 160 20 32 640
Totals 50 1,575 40 1,235
20 32 640
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Acct Principle
Apply Acct Principles To Inventory
258
3
OBJ
Consistency
Businesses should use the same accounting methods
and procedures from period to period.
A company may change inventory methods, but
it must disclose the effects of the change on net
income.
Disclosure
Acct Principle
The financial statements should report enough
information for outsiders to make knowledgeable
decisions about the company.
A company must disclose the method being used to
value inventory.
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Acct Principle
Apply Acct Principles To Inventory
258
3
0
OBJ
Materiality
An item is material if it has the potential to
alter a statement users decision.
Materiality is specific to the entity being
evaluated.
Conservatism
Acct Principle
Error on the side of caution when reporting any
item in the financial statements.
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• Apply the lower-of-cost-
• or-market rule to inventory

259
4
0
OBJ

• Inventory is reported at the lower of its
  historical cost or market (replacement) value.
• If replacement cost falls below its historical
  cost, a business must write down value of
  inventory.

• Cost of inventory 3,000
• Market value at balance sheet date 2,200
• What is the journal entry?

December 31 Cost of Goods Sold 800 Inventory
800 Write down inventory to LCM
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260
Assess Impact Of Inventory Errors
5
OBJ
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Gross Profit Method Example
Use Gross Profit Method to Estimate Inventory
262
6
6
OBJ
Beg Inventory 14,000 Net Purchases
66,000 Cost Of Goods Available for
Sale 80,000 Sales Revenue 100,000
Less Est. 40 Gross Profit - 40,000
Estimated COGS - 60,000 Estimated
Value of Ending Inventory 20,000
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Summary
CHAPTER 5 Merchandise Inventory
0
2 Inventory Systems
Perpetual
Periodic
4 Inventory Value Methods
Specific Unit Value
Average Cost
FIFO
First In First Out
LIFO
Last In First Out
Apply accounting principles of consistency,
disclosure, materiality, and conservatism to
inventory
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NEXT TOPIC
Bus Tec T101 Financial Accounting
Chapter 8 Cash Control