Accounting for Merchandise Inventory

1. Accounting forMerchandise Inventory Chapter 15

2. Understanding and journalizing transactions using the perpetual inventory system, and explaining the difference between perpetual and periodic inventory system. Learning Objective 1

3. Learning Unit 15-1(Perpetual Inventory System) Merchandise Inventory Cost of Goods Sold

4. Learning Unit 15-1(Perpetual Inventory System) The inventory debit balance is the up-to-date cost of inventory on hand. Purchased 10 software packages at a cost of $25 per package.

5. Inventory Accounts Payable 250 250 Learning Unit 15-1(Perpetual Inventory System) Merchandise Inventory 250 Accounts Payable 250 To record the purchase of inventory

6. Learning Unit 15-1(Perpetual Inventory System) As goods are sold, the cost of the goods are debited to the Cost of Goods Sold account and credited to the Inventory account.

7. Learning Unit 15-1(Perpetual Inventory System) Recording a sale Debit Cash or Accounts Receivable Credit Sales Revenue Debit Cost of Goods Sold Credit Merchandise Inventory

8. Learning Unit 15-1(Perpetual Inventory System) Sold three packages for cash for $150. Accounts Receivable 150 Sales Revenue 150 Cost of Goods Sold 75 Merchandise Inventory 75

9. Learning Unit 15-1(Perpetual Inventory System) Sales returns Debit Inventory Credit Cost of Goods Sold (For the cost of the goods returned by customer) Debit Sales Returns & Allowances Credit Cash (For the sales price of the goods returned)

10. Learning Unit 15-1(Perpetual Inventory System) Purchase returns Debit Accounts Payable Credit Inventory (For the cost of the goods returned to the supplier)

11. Learning Unit 15-1(Perpetual Inventory System) The perpetual system gives a day-to-day picture of sales and the cost of goods sold. The periodic system shows the proper balance in inventory at year end only.

12. Maintaining a subsidiary ledger for inventory. Learning Objective 2

13. Learning Unit 15-2(Using a Subsidiary Ledger) Accounting for inventory items becomes complicated as soon as product lines expand. Subsidiary ledgers are necessary to properly track inventory items. Daily posting (or instant recording through electronic computerized systems) allow managers easy access to information.

14. A-I-B Software Date 6/2 6/3 6/5 6/6 Purchased 10 @ $25 1 @ $25 Sold 3 @ $25 1 @ $25 Balance $250 $175 $200 $175 Learning Unit 15-2(Using a Subsidiary Ledger) Subsidiary Ledger

15. Item: VX113 Received Sold Balance Date 1/01 1/12 1/19 1/25 Units 10 Cost per Unit 60 Total FWD 600 Units 2 8 Cost per Unit 50 50 Total 100 400 Units 14 12 12 10 4 10 Cost per Unit 50 50 50 60 50 60 Total $ 700 600 1,200 800 Balance Learning Unit 15-2(Using a Subsidiary Ledger) Inventory Control

16. Understanding periodic methods of determining the value of the ending inventory. Learning Objective 3

17. Learning Unit 15-3(Periodic Inventory System) Inventory Accounting Methods Specific invoice FIFO LIFO Weighted average

18. Goods Available for Sale Calculating Cost of Ending Inventory 01/01 Beg. Inv. 03/15 Purch. 08/18 Purch. 11/15 Purch. Units 10 9 20 5 44 Cost $10 12 13 15 Total $100 108 260 75 $543 Units 6 6 12 Cost $12 13 Total $ 72 78 $150 Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543 150 $393 Learning Unit 15-3(Specific Invoice Method)

19. Learning Unit 15-3(FIFO Method) Goods Available for Sale Calculating Cost of Ending Inventory 01/01 Beg. Inv. 03/15 Purch. 08/18 Purch. 11/15 Purch. Units 10 9 20 5 44 Cost $10 12 13 15 Total $100 108 260 75 $543 Units 7 5 12 Cost $13 15 Total $ 91 75 $166 Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543 166 $377

20. Learning Unit 15-3(LIFO Method) Goods Available for Sale Calculating Cost of Ending Inventory 01/01 Beg. Inv. 03/15 Purch. 08/18 Purch. 11/15 Purch. Units 10 9 20 5 44 Cost $10 12 13 15 Total $100 108 260 75 $543 Units 10 2 12 Cost $10 12 Total $100 24 $124 Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543 124 $419

21. Learning Unit 15-3(Weighted-average Method) Goods Available for Sale $543 ÷ 44 = $12.34 (weighted-average cost per unit) 12 rakes × $12.34 = $148.08 01/01 Beg. Inv. 03/15 Purch. 08/18 Purch. 11/15 Purch. Units 10 9 20 5 44 Cost $10 12 13 15 Total $100 108 260 75 $543 Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543.00 148.08 $394.92

22. Learning Unit 15-3(Cost of Inventory Inclusions) Goods in transit: Add to inventory if the ownership of the inventory has been transferred to the buyer. Merchandise on consignment: This is not included in the cost of inventory. Damaged or obsolete merchandise: If it is not saleable, it should not be included in the cost of inventory. If saleable, add to the cost of inventory at a conservative figure.

23. Estimating ending inventory using the retail method and gross profit method and understanding how the ending inventory amount affects financial reports. Learning Objective 4

24. Retail Method Goods available for sale: CostRetail Beginning inventory $ 4,100 $ 6,900 Net purchases 7,900 13,100 Cost of goods available for sale $12,000 $20,000 Cost ratio, $12,000 ÷ $20,000 = 60% Net sales at retail 14,000 Inventory at retail $ 6,000 Ending inventory at cost, $6,000 × .60 $ 3,600 Learning Unit 15-4(Estimating Ending Inventory)

25. Learning Unit 15-4(Estimating Ending Inventory) Gross Profit Method Goods available for sale: Inventory, January 1, 20xx $10,000 Net purchases 4,000 Cost of goods available for sale $14,000 Less: Estimated cost of goods sold: Net sales at retail $6,000 Cost percentage (100% – 30%) .70 Estimated cost of goods sold 4,200 Estimated inventory, January 31, 20xx $ 9,800

26. If the Item is Overstated Understated Beginning inventory Ending inventory Profit is understated Profit is overstated Profit is overstated Profit is understated Learning Unit 15-4(Effect on Financial Reports)

27. End of Chapter 15