16 - 1 accounting for merchandise inventory chapter 16
TRANSCRIPT
16 - 1
Accounting for Merchandise
Inventory
Chapter 16
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Every business must choose aninventory evaluation method.Every business must choose aninventory evaluation method.
Inventories
This method must be usedconsistently from one
accounting period to the next.
This method must be usedconsistently from one
accounting period to the next.
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Inventories
Inventory management is a key to every successful business.
Insufficient inventory levels discourage customers from patronizing a business.
A store must also consider the cost of carrying inventory.
Dollars tied up in inventory cannot be used for other cash needs.
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Understanding and journalizingtransactions using the perpetualinventory system, and explaining
the difference between a perpetual
and periodic inventory system.
Learning Objective 1
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Learning Unit 16-1
A perpetual inventory system provides better internal control over inventories.
This type of system keeps a running balance in the inventory account.
This balance should equal inventory on hand.
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Merchandise Inventory
Cost of Goods Sold
Learning Unit 16-1
What are two key accounts?
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As goods are sold, the cost of thegoods are debited to this account
and credited to the inventory account.
As goods are sold, the cost of thegoods are debited to this account
and credited to the inventory account.
Learning Unit 16-1
The inventory debit balance is theup-to-date cost of inventory on hand.
The inventory debit balance is theup-to-date cost of inventory on hand.
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Debit Cash or Accounts ReceivableCredit Sales Revenue
Debit Cash or Accounts ReceivableCredit Sales Revenue
Debit Cost of Goods SoldCredit Inventory
Debit Cost of Goods SoldCredit Inventory
Learning Unit 16-1
Purchases are debited to the inventory account.
Cash or accounts payable is credited. A sale necessitates two entries:
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Debit InventoryCredit Cost of Goods Sold
(For the cost of the goods returned by customer)
Debit InventoryCredit Cost of Goods Sold
(For the cost of the goods returned by customer)
Debit Sales Returns & AllowancesCredit Cash
(For the sales price of the goods returned)
Debit Sales Returns & AllowancesCredit Cash
(For the sales price of the goods returned)
Learning Unit 16-1
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Learning Unit 16-1
Debit Accounts PayableCredit Inventory
(For the cost of the goods returned by to the supplier)
Debit Accounts PayableCredit Inventory
(For the cost of the goods returned by to the supplier)
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Learning Unit 16-1
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.
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Maintaining a subsidiary
ledger for inventory.
Learning Objective 2
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Learning Unit 16-2
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.
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Item: VX113 Received Sold Balance
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalJan. 1 14 $50 $700 12 2 $50 $100 12 50 600 19 10 $60 $600 12 50
10 60 1,200 25 8 50 400 4 50
10 60 800
Inventory Control
Learning Unit 16-2
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Understanding periodic methods
of determining the value of theending inventory.
Learning Objective 3
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Learning Unit 16-3
Different inventory valuing methods are used.
These methods often are not realistic in depicting the physical flow of goods sold.
Inventory amounts affect both the income statement and balance sheet.
Ending inventory errors affect more than one period’s financial statements.
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Learning Unit 16-3
Consistency is a key factor in inventory accounting.
Once a business selects a particular inventory method, it should be used every year, so that year-to-year comparisons can be made.
Inventory items are counted, but the cost of the inventory has to be decided also.
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FIFOFIFO
LIFOLIFO
Inventory Accounting MethodsInventory Accounting Methods
Specific InvoiceSpecific Invoice
Weighted AverageWeighted Average
Learning Unit 16-3
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January 1 20 units @ $10 = $ 200May 1 25 units @ $20 = $ 500October 2 25 units @ $30 = $ 750Total 70 $1,450Units sold 55Units left 15
January 1 20 units @ $10 = $ 200May 1 25 units @ $20 = $ 500October 2 25 units @ $30 = $ 750Total 70 $1,450Units sold 55Units left 15
Units Purchased in 200xUnits Purchased in 200x
Learning Unit 16-3
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Units sold by date:Jan 5 15 (Jan purchases)May 9 20 (May purchases)Oct 10 20 (5 from Jan., and 15
from Oct. purchases)Total sales 55
Units sold by date:Jan 5 15 (Jan purchases)May 9 20 (May purchases)Oct 10 20 (5 from Jan., and 15
from Oct. purchases)Total sales 55
15 units left in inventory15 units left in inventory
Learning Unit 16-3
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Cost of Goods SoldOct 10 $ 500May 9 400Jan 5 150Total $1,050
Cost of Goods SoldOct 10 $ 500May 9 400Jan 5 150Total $1,050
Ending InventoryOct $300May 100
Total $400
Ending InventoryOct $300May 100
Total $400
Specific Invoice MethodSpecific Invoice Method
Learning Unit 16-3
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Cost of Goods SoldJan 5 $ 150May 9 450Oct 10 550Total $1,150
Cost of Goods SoldJan 5 $ 150May 9 450Oct 10 550Total $1,150
Ending InventoryOct $300
Total $300
Ending InventoryOct $300
Total $300
FIFO MethodFIFO Method
Learning Unit 16-3
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Cost of Goods SoldOct 10 $ 250May 9 600Jan 5 450Total $1,300
Cost of Goods SoldOct 10 $ 250May 9 600Jan 5 450Total $1,300
Ending InventoryJan $150
Total $150
Ending InventoryJan $150
Total $150
LIFO MethodLIFO Method
Learning Unit 16-3
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Weighted Average MethodWeighted Average Method
Learning Unit 16-3
January 1 20 units @ $10 = $ 200May 1 25 units @ $20 = 500October 2 25 units @ $30 = 750Total 70 $1,450
January 1 20 units @ $10 = $ 200May 1 25 units @ $20 = 500October 2 25 units @ $30 = 750Total 70 $1,450
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Learning Unit 16-3
$1,450 total cost/70 total units $20.72 per unit Cost of goods sold = 55 × $20.72 = $1,139.60
Ending inventory = 15 × $20.72 = 310.80
$1,450.40* *.40 rounding difference
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Learning Unit 16-3
What items are included in inventory? Freight terms for purchases must be
checked. These items are included in the
merchandise inventory count if they were sent F.O.B. shipping point.
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Learning Unit 16-3
Consignment merchandise is merchandise held for sale for others who hold legal title.
Do not include these items in inventory.
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Estimating ending inventoryusing the retail method and
gross profit method, and how
the ending inventory amountaffects financial reports.
Learning Objective 4
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Goods Available Cost RetailBeg. Inventory $ 4,100 $ 6,900Net Purchases 7,900 13,100
$12,000 $20,000
Goods Available Cost RetailBeg. Inventory $ 4,100 $ 6,900Net Purchases 7,900 13,100
$12,000 $20,000
Ratio: $12,000 ÷ $20,000 = 60%Ratio: $12,000 ÷ $20,000 = 60%
Estimating Ending Inventory: Retail MethodEstimating Ending Inventory: Retail Method
Learning Unit 16-4
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Multiply the cost ratio times theretail price ending inventory.
Deduct net sales from retail goodsavailable for sale.
Learning Unit 16-4
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$6,000 × 60% = $3,600$6,000 × 60% = $3,600
$20,000 – $14,000 = $6,000$20,000 – $14,000 = $6,000
Learning Unit 16-4
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Beginning Inventory $10,000Net Purchases $ 4,000Net Sales at retail $ 6,000Cost percentage 70%Estimated Cost of Goods Sold 4,200
Beginning Inventory $10,000Net Purchases $ 4,000Net Sales at retail $ 6,000Cost percentage 70%Estimated Cost of Goods Sold 4,200
Estimating Ending Inventory: Gross Profit MethodEstimating Ending Inventory: Gross Profit Method
Learning Unit 16-4
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BeginningInventory$10,000
NetPurchases
$4,000
Cost of GoodsAvailable forSale $14,000
+
=
EndingInventory
$9,800=
Estimated Costof Goods Sold
$4,200–
Learning Unit 16-4
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End of Chapter 16