Accounting for Merchandise Inventory

1. Accounting for Merchandise Inventory Chapter 6

2. Inventory Accounting Systems

3. Compute and record journal entries for perpetual inventory amounts under FIFO, LIFO, and average cost. Objectives 1 and 2

4. Perpetual System

5. Computing the Cost of Inventory Physical count is made at least once a year, even with a perpetual system. Consigned goods are excluded.

6. Perpetual System Examples Assume the following: Nov. 1 Beg. Inventory 1 @ $40 15 Purchase 6 @ $45 15 Sale 4 26 Purchase 7 @ $50 30 Sale 8

7. Perpetual System FIFO Example Many companies keep their perpetual inventory records in quantities only. Other companies keep perpetual records in both quantities and dollar cost.

8. Perpetual FIFO Consistent with the physical flow of inventory Oldest inventory sold first Most recent purchases make-up ending inventory

9. Perpetual System FIFO Example

10. Perpetual System FIFO Example

11. Perpetual System FIFO Example Nov. 5 Inventory………….…270 Accounts Payable……270 15 Accounts receivable…320 Sales Revenue……….350 15 Cost of Goods Sold…175 Inventory…………….175

12. Perpetual System FIFO Example Nov. 26 Inventory………….…350 Accounts Payable……350 30 Accounts receivable…640 Sales Revenue……….640 30 Cost of Goods Sold…385 Inventory…………….385

13. Perpetual LIFO Is not consistent with the physical flow of inventory Oldest inventory costs make-up ending inventory Cost of goods sold is assumed to be from the most recent purchases

14. Perpetual System LIFO Example

15. Perpetual System LIFO Example

16. Perpetual System LIFO Example Nov. 5 Inventory………….…270 Accounts Payable……270 15 Accounts receivable…320 Sales Revenue……….350 15 Cost of Goods Sold…180 Inventory…………….180

17. Perpetual System LIFO Example Nov. 26 Inventory………….…350 Accounts Payable……350 30 Accounts receivable…640 Sales Revenue……….640 30 Cost of Goods Sold…395 Inventory…………….395

18. Perpetual System Average Cost Ending inventory and cost of goods sold are based on the average cost per unit. A new average cost per unit is computed after each purchase.

19. Perpetual System Average Cost Example

20. Perpetual System Average Cost Example

21. Perpetual System Average Cost Example Nov. 5 Inventory………….…270 Accounts Payable……270 15 Accounts receivable…320 Sales Revenue……….350 15 Cost of Goods Sold…177 Inventory…………….177

22. Perpetual System Average Cost Example Nov.26 Inventory………….…350 Accounts Payable……350 30 Accounts receivable…640 Sales Revenue……….640 30 Cost of Goods Sold…386 Inventory…………….386

23. Objective 3 Compare the effects of FIFO, LIFO, and average cost

24. Comparison of Methods

25. Comparison of Methods

26. Comparison of Methods Gross Margin from Sales: FIFO $400.00 LIFO $ 385.00 Weighted-average $ 397.00

27. Compute periodic inventory amounts under weighted-average cost, FIFO, and LIFO. Objective 4

28. Cost-of-Goods-Sold Model

29. Cost of Goods Sold under a periodic

30. Periodic System

31. Periodic System At the end of the period make a physical count and apply unit cost to determine ending inventory. Inventory purchases are debited to the purchases account. The inventory account carries the beginning inventory balance until adjusted at period end.

32. Units Purchased in 20xx

33. Units Sold and in Ending Inventory

34. Specific Identification

35. Specific Identification

36. Weighted Average

37. Weighted Average

38. First-In, First-Out

39. First-In, First-Out

40. Last-In, First-Out

41. Last-In, First-Out

42. Comparison of Methods

43. Comparison of Methods

44. Comparison of Methods Gross Margin from Sales: Specific identification $1,035.00 FIFO $1,100.00 LIFO $ 875.00 Weighted-average $1,022.50

45. The Income Tax Advantage of LIFO During periods of inflation, LIFO’s income is the lowest. The most attractive feature of LIFO is reduced income tax payments.

46. Use of the Various Inventory Costing Methods

47. LIFO Liquidation When prices are rising... the company draws down inventory quantities below the level of the previous period which releases older costs to the income statement.

48. Accounting Principles: Consistency

49. Accounting Principles: Disclosure

50. Accounting Principles: Materiality

51. Accounting Principles: Conservatism

52. Apply the lower-of-cost- or-market rule to inventory. Objective 5

53. Lower-of-Cost-or-Market An asset is reported at the lower of its historical cost or market (replacement) value. If the replacement cost falls below its historical cost, the business must write down the value of its inventory.

54. Lower-of-Cost-or-Market Example Cost of inventory: $3,000 Market value at balance sheet date: $2,200 What is the journal entry?

55. Determine the effects of inventory errors. Objective 6

56. Inventory Errors If inventory is computed incorrectly, how many years of financial statements will it affect? Two years The current year’s ending inventory is next year’s beginning inventory.

57. Estimate ending inventory by the gross profit method. Objective 7

58. Gross Profit

59. Gross Profit Method Example

60. Gross Profit Method Example

61. End of Chapter 6