© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Inventory Systems

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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periodic

perpetual

Perpetual Inventory• continuously discloses inventory on hand• increases in inventory debited to Inventory

(and posted to subsidiary ledger)• two entries to record sales transactions REVENUE:

REDUCTION IN INVENTORY:

• physical inventory still needed annually to compare with and update inventory records

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Accounts Receivable -- Customer

retail

Sales retail

Cost of Goods Sold cost

Inventory cost

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Periodic Inventory

• increases recorded in Purchases• at time of sale, record revenue

but no entry for reduction in inventory

• physical inventory (actual count) necessity at end of period to determine cost of goods sold

Real Life Perspective

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice

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Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions

As seen in Home Depot, October 12, 2011

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

8

Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions

– business often closes in order to count

– best to count in “teams” of two

As seen in Home Depot, October 12, 2011

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

16

Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

17

Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 19

Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped

– FOB D

© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 20

Physical Inventory Procedures

• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped

– FOB D -- title passes when goods arrive

BUYER

D

Mack’s Trucking

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Importance of Inventory• most active element

of a merchandising business

• principal source of revenue

• largest current asset

• largest deduction from revenue

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P

EI

BI

Importance of Inventory

COGS

GAFS

To Balance Sheet

To IncomeStatement

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Importance of Inventory

Inventory Net Income Assets Capital

Effects of Misstatement

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Arbitrary Assumptions Concerning Cost Flow

• in order expenditures were made

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Arbitrary Assumptions Concerning Cost Flow

• in order expenditures were made -- FIFO

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Arbitrary Assumptions Concerning Cost Flow

• in order expenditures were made -- FIFO

• in reverse order in which expenditures were made

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Arbitrary Assumptions Concerning Cost Flow

• in order expenditures were made -- FIFO

• in reverse order in which expenditures were made -- LIFO

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Arbitrary Assumptions Concerning Cost Flow

• in order expenditures were made -- FIFO

• in reverse order in which expenditures were made -- LIFO

• average of expenditures

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Balance Sheet Income Statement

MI COGS

First In … First OUT

Latest Ite

ms Left O

ver

Time Time Time Time Time Time Time Time Time

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Balance Sheet Income Statement

MI COGS

Las

t In

Firs

t OU

TOldest Item

s Left

Time Time Time Time Time Time Time Time Time

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Balance Sheet Income Statement

MI COGS

FIFO LIFO FIFO LIFO

Rising Prices

NI

Time Time Time Time Time Time Time Time Time

Opportunity

• Extension of Lecture• Handout• Video Link on Class Web Site• Demonstration Exercise• Strongly recommended before first

HW assignment

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© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved.

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