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Advantages of Using Periodic Inventory
• The accounting records for inventory and
cost of goods sold are updated only at the end of the accounting period (month, year, etc.). • Thus, in the middle of the period, there is no record that shows how much inventory is on hand or how much has been sold (COGS). • This is an easy, inexpensive method.
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COGS Schedule
Assume that each unit cost $6
Units
Beg. Inventory + Purchases = Goods Available - End. Inventory = Cost of Goods Sold 3 8 11 5 6
Cost
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4-2 Two inventory systems
P110
• Two main systems for keeping merchandise inventory records:
–Perpetual inventory system - a system that keeps a running, continuous record that tracks inventories and the cost of goods sold on a day-to-day basis –Periodic inventory system - a system in which the cost of good sold is computed periodically by relying solely on physical counts without keeping day-to-day records of units sold or on hand.
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Learning Abstract
4-1 Service enterprise Vs merchandising concern 4-2 Two inventory systems 4-3 Purchase, Sales Revenue and Cost of Goods Sold 4-4 Alternative Income Statement Formats 4-5 Worksheet and Closing Entries 4-6 Practices in China 4-7 Acid-test Ratio, Gross margin Ratio
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4-1 Service enterprise Vs Merchandising Concern
– Service enterprises provide services or intangible products to their customers. – Merchandising-sector companies purchase and then sell tangible products without changing their basic form.
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Cost of Goods Sold
The goods available for sale represents the amount that “could have been” sold. The goods that are NOT sold are called “ending inventory.” Subtracting the ending inventory from the goods available for sale determines the amount of “cost of goods sold”.
Chapter 4 Merchandising Activities and Accounting Information Systems Learning Objectives
1. Nature of Merchandising Business 2 a. Accounting for Purchases 2 b. Accounting for Sales 2 c. Transportation Costs 2 d. Merchandise Transactions 3. Merchandising Chart of Accounts 4. Merchandising Income Statement 5. Merchandising Accounting Cycle 6. Acid-test Ratio, Gross margin Ratio
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4-3 Purchase, Sales Revenue and Cost of Goods Sold
• In the perpetual system, purchases of merchandise directly increase the Inventory account, and purchase returns and allowances and sales directly decrease the Inventory account. • Inventory amounts are updated each time an inventory transaction is processed.
Merchandise Inventory
Equals : Gross Profit Minus: Selling and Administrative Expenses Equals: Net Income
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Tracking Inventory Costs: Goods available for sale
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Income Statement
Service Business
Fees earned Operating expenses Net income
$XXX –XXX $XXX
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Income Statement
Merchandising Business Sales Cost of Merchandise Sold Gross Profit Operating Expenses Net Income $XXX –XXX $XXX –XXX $XXX
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Advantages of Using Perpetual Inventory
Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those items
$18 48 $66 30 $36 BI + Purch GAFS - EI COGS
All available goods must be accounted for as either ending inventory or COGS.
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Inventory Systems
• The key to calculating cost of goods sold is accounting for the ending inventory. • Cost valuation - process of assigning specific historical costs to items counted in the physical inventory
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1. Purchases and Purchase Returns
• In a perpetual system, the journal entries are:
To record the purchase of merchandise : Merchandise inventory Accounts payable (or Cash) To record the return of merchandise: Accounts payable Merchandise inventory
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Income Statement Comparison
Service Business Fees earned Operating expenses Net income $150,000 120,000 $ 30,000
20% of revenues
Merchandising Business Sales revenue Cost of mdse. sold Gross profit Operating expenses Net income $600,000 450,000 $150,000 120,000 $ 30,000 75% of revenues
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Taking a Physical Count
• Regardless of the type of accounting