Inventory (at FIFO Cost)
Beg bal Purchases:
No. 1 (25 units @ $14) No. 2 (25 units @ $18)
$100
350 450
Cost of goods sold (40 units):
(10 units @ $10)
100
(25 units @ $14)
Inventory Recorded cost of goods sold
Debit 560,000
Credit 560,000
900,000
900,000
540,000
540,000
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11
Recording Inventory (Amounts Assumed)
8
Inventory Systems
Perpetual
Used for all types of goods
Keeps a running total of all goods bought, sold and on hand Inventory counted at least once a year
9
Perpetual Inventory
• Bar codes on products provide information to record
▫ Sale of item ▫ Update of inventory record
• Two entries needed for each sale
Expense on the Income Statement
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5
Number of units
• Determined from accounting records • Evidenced by physical count at year end • Consigned goods:
▫ Automobiles, fine jewelry, real estate
• Inventory costed at specific price of the particular unit
• Too expensive for inventories with common characteristics
▫ Record revenue and asset received (cash or receivables)
▫ Record cost of sale and reduction of inventory
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Recording Inventory (Amounts Assumed)
Cost of goods available *
Number of units available*
*Goods available = Beginning inventory + Purchases
Cost of goods sold
Number of units sold
Average cost per unit
Specific Average
unit
cost
First-in, Last-in, first-out first-out
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Specific Unit
• Used for businesses with unique inventory items
6
Shipping terms
FOB Shipping Point
• Legal title passes to purchaser when items leave seller’s place of business
• Purchaser owns good while in transit
▫ Included in purchaser’s inventory count
▫ Included in seller’s inventory count
• Seller pays transportation costs
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Recording inventory-related transactions
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14
Net Sales
Sales revenue - Sales returns and allowance - Sales discounts = Net sales
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• Cost of inventories comprises of: • Cost of purchase • Cost of conversion • Cost of bringing in the inventories
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Inventory Methods
• Purchaser pays transportation costs
FOB Destination
• Legal title passes to purchaser when items arrive at purchaser’s place of business
• Seller owns goods while in transit
12
Reporting in the Financial Statements
Balance Sheet (partial) Current assets: Cash Accounts receivable Inventory
$$$$ $$$$ $70,000
Income Statement (partial)
Chapter 6
Inventory and Merchandising
Operations
Understand the nature of inventory and retailing operations
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2
Accounting For Inventory
15
Determine inventory and cost of sales based on various inventory cash flow assumptions.
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Inventory Costing
• Manager decides which accounting method to use, which affects: • Profits • Income tax • Ratios
Sales
$900,000
Cost of goods sold
540,000
Gross profit
$360,000
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Cost of Net Purchases
Purchase price + Freight-in - Purchase returns - Purchase allowances - Purchase discounts = Net purchases
(25 units @ $18)
450
(15 units @ $14)
210
Ending (10 units @ $10) 240 Balance (10 units @ $14)
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Average Cost
Average cost per unit
▫ Does not include those held for another company ▫ Does include those out on consignment
• In transit goods
▫ Depends on shipping terms
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350
(5 units @ $18)
90
Ending (20 units @ $18) 360 Balance
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Last-in, First-out (LIFO)
• Most recent items purchased are assumed to be sold first
• Oldest costs in ending inventory
Inventory (at FIFO Cost)
Beg bal Purchases:
No. 1 (25 units @ $14) No. 2 (25 units @ $18)
$100
350 450
Cost of goods sold (40 units):
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