Accounting for Merchandise Inventory Chapter 6 Perpetual systems maintain a running record to show...
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![Page 1: Accounting for Merchandise Inventory Chapter 6 Perpetual systems maintain a running record to show the inventory on hand at all times. Periodic systems.](https://reader035.fdocuments.us/reader035/viewer/2022081419/56649d565503460f94a34651/html5/thumbnails/1.jpg)
Accounting for Merchandise Inventory
Chapter 6
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Perpetual systems maintain a running recordto 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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Compute and record journal entries for perpetual
inventory amounts under FIFO, LIFO, and average
cost.
Objectives 1 and 2
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Debit Cash or Accounts ReceivableCredit Sales Revenue
Debit Cost of Goods SoldCredit Inventory
Perpetual System
Debit Inventory Credit Cash or Accounts Payable
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Cost of inventory on hand = Quantity × unit cost
Computing the Cost of Inventory
• Physical count is made at least once a year, even with a perpetual system.
• Consigned goods are excluded.
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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
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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.
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Perpetual FIFO
• Consistent with the physical flow of inventory
• Oldest inventory sold first
• Most recent purchases make-up ending inventory
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Perpetual System FIFO Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 1 1 $40 $40
5 6 $45 $270 1 40 40 6 45 270
15 1 40 40 3 45 135 3 45 135
Columbia Sportswear
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Perpetual System FIFO Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 26 7 $50 $ 350 3 $45 $135
7 50 350 30 3 $45 135
5 50 250 2 50 100Totals 13 $ 620 12 $560 2 $100
Columbia Sportswear
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Perpetual System FIFO Example
Nov. 5 Inventory………….…270Accounts Payable……270
15 Accounts receivable…320Sales Revenue……….350
15 Cost of Goods Sold…175Inventory…………….175
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Perpetual System FIFO Example
Nov. 26 Inventory………….…350Accounts Payable……350
30 Accounts receivable…640Sales Revenue……….640
30 Cost of Goods Sold…385Inventory…………….385
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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
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Perpetual System LIFO Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 1 1 $40 $40
5 6 $45 $270 1 40 40 6 45 270
15 4 45 180 1 40 40 2 45 90
Columbia Sportswear
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Perpetual System LIFO Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 26 7 $50 $ 350 1 $40 $135
2 45 90 7 50 350
30 7 $50 350 1 45 45 1 40 40
1 45 45 Totals 13 $ 620 12 $575 2 90
Columbia Sportswear
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Perpetual System LIFO Example
Nov. 5 Inventory………….…270Accounts Payable……270
15 Accounts receivable…320Sales Revenue……….350
15 Cost of Goods Sold…180Inventory…………….180
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Perpetual System LIFO Example
Nov. 26 Inventory………….…350Accounts Payable……350
30 Accounts receivable…640
Sales Revenue……….640
30 Cost of Goods Sold…395Inventory…………….395
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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.
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Perpetual System Average Cost Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 1 1 40.00 40
5 6 $45 $270 7 44.29 310
15 4 44.29 177 3 44.29 133
Columbia Sportswear
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Perpetual System Average Cost Example
Item: Ski Parka Received Sold Balance on Hand
Unit Unit UnitDate Qty. Cost Total Qty. Cost Total Qty. Cost TotalNov. 26 7 $50 $ 350 10 48.30 483
30 8 48.30 386 2 48.30 97
Totals 13 $ 620 12 $563 2 $ 97
Columbia Sportswear
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Perpetual System Average Cost Example
Nov. 5 Inventory………….…270Accounts Payable……270
15 Accounts receivable…320Sales Revenue……….350
15 Cost of Goods Sold…177Inventory…………….177
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Perpetual System Average Cost Example
Nov.26 Inventory………….…350Accounts Payable……350
30 Accounts receivable…640Sales Revenue……….640
30 Cost of Goods Sold…386Inventory…………….386
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Objective 3
Compare the effects of FIFO, LIFO, and average cost
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Ending InventoryFIFO $100.00LIFO $ 90.00Weighted-average $ 97.00
Comparison of Methods
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Cost of Goods SoldFIFO $560.00LIFO $575.00Weighted-average $563.00
Comparison of Methods
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When prices are rising LIFO producesthe lowest income and lowest income tax.
Comparison of Methods
• Gross Margin from Sales:
FIFO $400.00
LIFO $ 385.00
Weighted-average $ 397.00
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Compute periodic inventory amounts under
weighted-average cost,FIFO, and LIFO.
Objective 4
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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
BeginningInventory$100,000
NetPurchases$560,000
Cost of GoodsAvailable forSale $660,000
+ =
EndingInventory$120,000
=Cost of Goods
Sold$540,000
–
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Accounts Payable
Inventory
120,000Ending
Balance
Purchases
560,000Purchases
100,000BeginningBalance
Cost of Goods Sold100,000560,000540,000
120,000EndingBalance560,000
Purchases
560,000Purchases
100,000Beginning
Balance
Periodic System
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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.
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January 8 20 units @ $20 = $ 400May 19 55 units @ $30 = $1,650October 23 25 units @ $31 = $ 775Total units 100 Units sold 70Units left 30
Units Purchased in 20xx
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Units sold by date:Jan 5 17May 19 33Oct 23 20Total sales 70
30 units left in inventory
Units Sold and in Ending Inventory
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Cost of Goods SoldOct 23 $ 620May 19 990Jan 5 340Total $1,950
Specific Identification
20 Units @ $31
5 Units @ $31
20 Units @ $31
5 Units @ $31
33 Units @ $30
22 Units @ $30
33 Units @ $30
22 Units @ $30
17 Units @ $20
3 Units @ $20
17 Units @ $20
3 Units @ $20
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Ending InventoryOct 23 $155May 660Jan 60Total $875
Specific Identification
20 Units @ $31
5 Units @ $31
33 Units @ $30
22 Units @ $30
17 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 $ 400May 1,500Total $1,900
First-In, First-Out
25 Units @ $31 (Oct)
5 Units @ $30 (May)
50 Units @ $30
20 Units @ $20 (Jan)
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Ending InventoryOct $775May 150Total $925
First-In, First-Out
25 Units @ $31 (Oct)
5 Units @ $30 (May)
50 Units @ $30
20 Units @ $20 (Jan)
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Cost of Goods SoldOct $ 775May 1,350Total $2,125
Last-In, First-Out
25 Units @ $31 (Oct)
45 Units @ $30 (May)
10 Units @ $30
20 Units @ $20 (Jan)
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Ending InventoryOct $300May 400Total $700
Last-In, First-Out
25 Units @ $31 (Oct)
45 Units @ $30 (May)
10 Units @ $30
20 Units @ $20 (Jan)
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Ending InventorySpecific identification $875.00FIFO $925.00LIFO $700.00Weighted-average $847.50
Comparison of Methods
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Cost of Goods SoldSpecific identification $1,965.00FIFO $1,900.00LIFO $2,125.00Weighted-average $1,977.50
Comparison of Methods
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When prices are rising LIFO producesthe lowest income and lowest income tax.
Comparison of Methods
• 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, LIFO’s income is the lowest.
• The most attractive feature of LIFO is reduced income tax payments.
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Use of the Various Inventory Costing Methods
LIFO32%
FIFO44%
Average20%
Other4%
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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.
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The business should use the same accountingmethods and procedures from one period to the next.
A company may change inventory methods, but itmust disclose the effects of the change on net income.
Accounting Principles: Consistency
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The financial statementsshould report enoughinformation to enablean outsider to make
knowledgeable decisionsabout the company.
Accounting Principles: Disclosure
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Accounting Principles: Materiality
An item is material if it has the potentialto alter a statement user’s decision.
Materiality is specific tothe entity being evaluated.
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Err on the sideof caution when
reporting any item inthe financial statements.
Accounting Principles: Conservatism
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Apply the lower-of-cost-or-market rule to
inventory.
Objective 5
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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.
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December 31Cost of Goods Sold 800
Inventory 800Write down inventory to LCM
Lower-of-Cost-or-Market Example
• Cost of inventory: $3,000
• Market value at balance sheet date: $2,200
• What is the journal entry?
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Determine the effects of
inventory errors.
Objective 6
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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.
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Estimate ending inventoryby the gross profit
method.
Objective 7
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Sales revenues – Cost of goods sold =Gross margin (before operating expenses)
Gross margin – Operating expenses =Net income
Gross Profit
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Net Sales $150,000Gross Profit Margin 31.5%Beginning Inventory $ 18,500Net Purchases $110,500
Gross Profit Method Example
Net Sales $150,000– Gross Profit of 31.5% 47,250= Cost of Goods Sold $102,750
![Page 60: Accounting for Merchandise Inventory Chapter 6 Perpetual systems maintain a running record to show the inventory on hand at all times. Periodic systems.](https://reader035.fdocuments.us/reader035/viewer/2022081419/56649d565503460f94a34651/html5/thumbnails/60.jpg)
Gross Profit Method Example
BeginningInventory$18,500
NetPurchases$110,500
Cost of GoodsAvailable forSale $129,000
+ =
EndingInventory$26,250
=Cost of Goods
Sold$102,750
–
![Page 61: Accounting for Merchandise Inventory Chapter 6 Perpetual systems maintain a running record to show the inventory on hand at all times. Periodic systems.](https://reader035.fdocuments.us/reader035/viewer/2022081419/56649d565503460f94a34651/html5/thumbnails/61.jpg)
End of Chapter 6