Learning Objectives

• Understand the Business– LO1 Describe the issues in managing different types of inventory.

• Study the accounting methods– LO2 Explain how to report inventory and cost of goods sold.– LO3 Compute costs using three inventory costing methods.– LO4 Report inventory at the lower of cost and net realizable value.– LO5 Analyze and record inventory purchases, transportation, returns

and allowances, and discounts.• Evaluate the results

– LO6 Evaluate inventory management by computing and interpreting the inventory turnover ratio.

• Review the chapter

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Recording Inventory Transactions

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Inventory PurchasesAmerican Eagle Outfitters purchases $10,500 of vintage jeans

on credit with terms 2/10 n/30.

1Assets = Liabilities + Shareholders' Equity

Inventory +10,500 Accounts Payable +10,500

Analyze

2 Record

LO5

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Transportation CostAmerican Eagle Outfitters pays $400 cash to a trucker who

delivers the vintage jeans to one of its stores:

1Assets = Liabilities + Shareholders' Equity

Cash - 400Inventory + 400

Analyze

2 Record

All costs needed to get inventory into a condition and location ready for sale should be included in Inventory.

All costs incurred after the sale, such as delivery of goods to customers, should be treated as selling expenses.

LO5

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Purchase Returns and AllowancesAmerican Eagle Outfitters returned some of the vintage jeans to the

supplier and received a $500 reduction in the balance owed:

LO5

1Assets = Liabilities + Shareholders' Equity

Inventory - 500 Accounts Payable - 500

Analyze

2 Record

Purchase Returns and Allowances are a reduction in the cost of inventory purchases associated with unsatisfactory goods.

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Purchase DiscountsAmerican Eagle Outfitters pays the supplier for the $10,500 purchase of

vintage jeans. Remember, the terms were 2/10 n/30 and inventory costing $500 has been returned, so the amount paid within the discount period

will be ($10,500 - $500) – 2% = $9,800.

Purchase Discounts are cash discounts received for prompt payment of a purchase on account. A purchase discount reduces the cost of inventory.

1Assets = Liabilities + Shareholders' Equity

Cash - 9,800 Accounts Payable -10,000Inventory -200

Analyze

2 Record

LO5