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Perpetual systems maintain a running record

to show the inventory on hand at all times.

Periodic systems do not keep acontinuous record of inventory on hand.

Inventory Accounting Systems

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Periodic System

This type of inventory system does not keep an

updated record of all goods bought, sold and on

hand.

In a periodic system cost of goods sold is only

determined at the end of the accounting period

once inventory is counted.

This system is not as widely used as the perpetualsystem.

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Periodic System

At the end of the period make a physicalcount and apply unit cost to determineending inventory.

Inventory purchases are debited to thepurchases account.

The merchandise inventory account carries

the beginning inventory balance untiladjusted at period end.

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When merchandise is purchased for resale to

customers, the temporary account, Purchases, is

debited for the cost of goods.

Like sales, purchases may be made for cash or on

account (credit).

The purchase is normally recorded by the

purchaser when the goods are received from theseller.

Each credit purchase should be supported by a

purchase invoice.

PURCHASES OF

MERCHANDISE

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NORMAL BALANCES: COST OFGOODS PURCHASED ACCOUNTS

We used 4 accounts to record the purchase ofinventory under a periodic inventory system.

These accounts are:

NormalAccount Balance

PurchasesPurchase Returns and AllowancesPurchase DiscountsFreight-in

DebitCredit

Credit

Debit

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CHELSEA VIDEODate Account Titles and Explanation Debit Credit

May 4 Purchases 3,800Accounts Payable 3,800

(To record goods purchased onaccount, terms 2/10, n/30)

PERIODIC SYSTEMTRANSACTIONS

Purchases is a temporary account whose normal balance is a debit.

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May 8 Accounts Payable 300Purchase Returns and Allowances 300

(To record return of inoperablegoods purchased from Highpoint

Electronic


Purchase Returns and Allowances is a temporary account whosenormal balance is a credit.

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Freight Costs -

On Incoming Inventory

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May 9 Freight-in 150Cash 150

(To record payment of freight,terms FOB shipping point)

Freight-in is a temporary account whose normal balance is a debit.

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May 14 Accounts Payable 3,500Purchase Discounts 70Cash 3,430

(To record payment to Highpoint

Electronic within the discountperiod)


Purchase Discounts is a temporary account whose normal balance is

a credit.

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To determine cost of goods purchased:

1 Subtract Purchase Returns and

Allowances and Purchase Discounts from

Purchases to produce net purchases.

2 Add Freight-in to net purchases to

produce cost of goods purchased.

COST OF GOODS

PURCHASED

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Purchases $ 325,000

Less: Purchase returns and allowances $ 10,400

Purchase discounts 6,800 17,200Net purchases 307,800

Net Purchases

NetPurchases are gross purchases

adjusted for returns and discounts.

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Cost of Goods Purchased

Purchases $ 325,000

Less: Purchase returns and allowances $ 10,400

Purchase discounts 6,800 17,200

Net purchases 307,800Add: Freight-in 12,200

Cost of goods purchased 320,000

Cost of goods purchased is netpurchases plus freight-in.

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Recording Inventory Purchases

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Recording Inventory Sales

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COST OF GOODS SOLD

To determine the cost of goods sold

under a periodic inventory system, it is

necessary to:

1 record purchases of merchandise,

2 determine the cost of goods purchased,

and3 determine the cost of goods on hand at

the beginning and end of the accounting

period.

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DETERMINING COST

OF GOODS SOLD

Computing cost of goods sold involves 2 steps:

1 Add the cost of goods purchased to the

beginning cost of goods on hand to obtainthe cost of goods available for sale.

2 Subtract the ending cost of goods on hand

from the cost of goods available for sale to

arrive at the cost of goods sold.

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Cost of Goods Sold is determined as follows:

Beginning inventory $ 36,000

Add: Cost of goods purchased 320,000

Cost of goods available for sale 356,000

Less: Ending inventory 40,000Cost of goods sold $ 316,000

COMPUTATION OF COST OF GOODS AVAILABLEFOR SALE AND COST OF GOODS SOLD

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INCOME STATEMENT FOR A MERCHANDISINGCOMPANY USING A PERIODIC INVENTORY SYSTEM

HIGHPOINT ELECTRONIC INC.Income Statement

For the Year Ended December 31, 1996Sales revenues

Sales $480,000Less: Sales returns and allowances $ 12,000

Sales discounts 8,000 20,000

Net sales 460,000Cost of goods sold

Inventory, January 1 36,000

Purchases $325,000Less: Purchases returns and allowances 10,400

Purchases discounts 6,800

Net purchases 307,800Add: Freight-in 12,200

Cost of goods purchased 320,000

Cost of goods available for sale 356,000Inventory, December 31 40,000

Cost of goods sold 316,000

Gross profit 144,000

Operating expensesStore salaries expense 45,000Rent expense 19,000Utilities expense 17,000Advertising expense 16,000Depreciation expense store equipment 8,000Freight-out 7,000Insurance expense 2,000

Total operating expenses 114,000

Net income $ 30,000

The income statement under a

periodic inventory system

contains 3 distinctive features:

1 a sales revenue section,2 a cost of goods sold section, and

3 gross profit.

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Compute periodic inventory

amounts underweighted-average cost,

FIFO, and LIFO.

Objective

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DETERMINING COST

OF GOODS ON HAND

Under the periodic method, cost of inventory

on hand is determined from a physical

inventory requiring:

1 Counting the units on hand for each

inventory item.

2 Applying unit costs to the total units on

hand for each inventory item.3 Aggregating the cost of each item of

inventory to determine total cost of goods

on hand.

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Taking a Physical Inventory

Counting, weighting or measuring

each type of inventory

Determining ownership of goods Quantity of each kind of inventory

listed on inventory summary sheets

where unit costs are applied

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ALLOCATINGINVENTORIABLE COSTS

Inventoriable costs are allocated between ending

inventory and cost of goods sold.

Under a periodic inventory system, the allocation

is made at the end of the accounting period.1 The costs assignable to the ending inventory are

determined.

2 The cost of the ending inventory is subtracted

from the cost of goods available for sale todetermine the cost of goods sold.

3 Cost of goods sold is then deducted from sales

revenues in accordance with the matching

principle.

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Inventory Costing

Specific Identification method

Assumed Cost Flow methods

FIFO- First-in, First-Out- earliest goodspurchased first to be sold

LIFO- Last-in,First-Out- latest goods

purchased the first to be sold

Average Cost Method- costs are charged on

the basis of weighted average unit cost

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Step 1 Step 2

Ending Inventory Cost of Goods SoldUnit Total

Date Units Cost Cost

11/27 400 $ 13 $ 5,200 Cost of goods available for sale $ 12,00008/24 50 12 600 Less: Ending inventory 5,800

450 Cost of goods sold

ALLOCATION OF COSTS- FIFO METHOD

Pool of Costs

Cost of Goods Available for Sale

Unit TotalDate Explanation Units Cost Cost

01/01 Beginning inventory 100 $10 $ 1,000

04/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200

Total 1,000 $ 12,000

$ 5,800 $ 6,200

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100 $ 10 $ 1,000200 11 2,200

250 12 3,000

550 $ 6,200

PROOF OF COST OF GOODS SOLD

The accuracy of the cost of goods soldcan be verified by recognizing that thefirst units acquired are the first units sold.

Unit TotalDate Units Cost Cost

01/01 X =04/15 X =08/24 X =

Total

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Step 1 Step 2

Ending Inventory Cost of Goods Sold

Unit TotalDate Units Cost Cost

01/01 100 $ 10 $ 1,00004/15 200 11 2,200 Cost of goods available for sale $ 12,00008/24 150 12 1,800 Less: Ending inventory 5,000

450 Cost of goods sold

ALLOCATION OF COSTS- LIFO METHOD

Pool of Costs



01/01 Beginning inventory 100 $10 $ 1,00004/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200

Total 1,000

$ 12,000

$ 5,000 $ 7,000

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PROOF OF COST OF GOODS SOLD

The cost of the last goods in are the first to be assignedto cost of goods sold. Under a periodic inventorysystem, all goods purchased during the period are

assumed to be available for the first sale, regardless ofthe date of purchase.

Unit Total

Date Units Cost Cost11/27 X =

X =08/24

Total

400 $ 13 $ 5,200150 12 1,800

550 $ 7,000

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The average cost method assumes thatgoods available for sale are homogeneous.

The allocation of the cost of goods

available for sale is made on the basis of

the weighted average unit cost incurred.

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The average cost method assumes that

goods available for sale arehomogeneous.

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Step 1 Step 2

Ending Inventory Cost of Goods Sold

$ 12,000 1,000 = $12.00Unit Total Cost of goods available for sale $ 12,000

Units Cost Cost Less: Ending inventory 5,400

450 x $ 12.00 = Cost of goods sold

ALLOCATION OF COSTS -AVERAGE COST METHOD

Pool of Costs



01/01 Beginning inventory 100 $10 $ 1,000

04/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200

Total 1,000 $ 12,000

$ 5,400 $ 6,600

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Factors Used in Selecting an

Inventory Cost Method

Income statement effects

Balance sheet effects

Tax Effects

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Income Statement Effects

In periods ofincreasing prices

FIFO reports the highest net income

LIFO the lowestaverage cost falls in the middle.

In periods ofdecreasing prices

FIFO will report the lowest net income

LIFO the highest

average cost in the middle.

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Balance Sheet Effects

In a period ofincreasing prices costs

allocated to ending inventory using:

FIFO will approximate current costs

LIFO will be understated

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Why Do Companies Use

Lifo?

Higher cost of goods sold

Lower net income

Lower Income Taxes

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Cost-of-Goods-Sold Model

Budgeted Cost of Goods Sold

Budgeted Ending Inventory+

=

Actual Beginning Inventory

= Purchases

Budgeted Cost of Goods Available for Sale

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Cost of Goods Sold under a

periodic

Beginning

Inventory

$100,000

Net

Purchases

$560,000

Cost of GoodsAvailable for

Sale $660,000

+ =

EndingInventory

$120,000

=Cost of Goods

Sold

$540,000

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Accounts Payable

Inventory

120,000Ending

Balance

Purchases

560,000

Purchases

100,000Beginning

Balance

Cost of Goods Sold

100,000560,000

540,000

120,000EndingBalance

560,000

Purchases

560,000

Purchases

100,000Beginning

Balance

Periodic System

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January 8 20 units @ $20 = $ 400

May 19 55 units @ $30 = $1,650October 23 25 units @ $31 = $ 775

Total units 100

Units sold 70Units left 30

Units Purchased in 20xx

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Units sold by date:

Jan 5 17May 19 33

Oct 23 20

Total sales 70

30 units left in inventory

Units Sold and in

Ending Inventory

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Cost of Goods SoldOct 23 $ 620

May 19 990

Jan 5 340Total $1,950

Specific Identification

20 Units @ $31

5 Units @ $31

33 Units @ $30

22 Units @ $3017 Units @ $20

3 Units @ $20

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Ending InventoryOct 23 $155

May 660

Jan 60Total $875

Specific Identification

20 Units @ $31

5 Units @ $31

33 Units @ $30

22 Units @ $3017 Units @ $20

3 Units @ $20

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Weighted Average

25 Units @ $31 (Oct)

55 Units @ $30 (May)

20 Units @ $20 (Jan)

= $ 775

= 1,650

= 400= $2,825 Total Cost100 Total Units

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Weighted Average

$2,825 total cost/100 units = $28.25/unit

Cost of goods sold = 70 $28.25 = $1977.50

Ending inventory = 30 $28.25 = $847.50

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Cost of Goods SoldJan $ 400

May 1,500

Total $1,900

First-In, First-Out


5 Units @ $30 (May)

50 Units @ $30


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Ending InventoryOct $775

May 150

Total $925

First-In, First-Out


5 Units @ $30 (May)

50 Units @ $30


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Cost of Goods SoldOct $ 775

May 1,350

Total $2,125

Last-In, First-Out



10 Units @ $30


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Ending InventoryOct $300

May 400

Total $700

Last-In, First-Out



10 Units @ $30


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EndingInventorySpecific identification $875.00

FIFO $925.00

LIFO $700.00Weighted-average $847.50

Comparison of Methods

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Cost of Goods SoldSpecific identification $1,965.00

FIFO $1,900.00

LIFO $2,125.00Weighted-average $1,977.50


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When prices are rising LIFO produces

the lowest income and lowest income tax.


Gross Margin from Sales:

Specific identification $1,035.00

FIFO $1,100.00

LIFO $ 875.00

Weighted-average $1,022.50

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The Income Tax

Advantage of LIFO

During periods of inflation, LIFOs income

is the lowest.

The most attractive feature of LIFO isreduced income tax payments.

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periodic (1)

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