chapter 51 inventory. chapter 52 comparison of perpetual and periodic inventory systems

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Page 1: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 1

Chapter 5Inventory

Page 2: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 2

Comparison of Perpetual and Periodic Inventory Systems

Page 3: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 3

Inventory Accounting Terms

• Sales• Sales Returns and Allowances• Sales Discounts• Purchase Returns and

Allowances • Purchase Discounts• Freight-In• Delivery Expense(Freight-out)• Cost of Goods Sold

Page 4: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 4

Shipping Terms

FOB Shipping Point: BuyerBuyer payspays to get the goods to the destination.

FOB Destination: Seller paysSeller pays to get the goods to the destination.

Page 5: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 5

Accounting for Common Inventory Transactions

Six common transactions are related to accounting for inventory:a. Purchasing inventory from a supplierb. Paying for freight on purchasesc. Returning inventory to a supplierd. Selling inventory to a customere. Accepting returns of inventory from a customerf. Paying on account for purchases of inventory

The next few slides will show examples of journal entries for the above transactions.

Page 6: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 6

Purchasing Inventory From a Supplier

On August 1, Marcia’s Boutique purchased 12 dresses at $50 each from a supplier, Kwon, Inc. The credit terms are 2/10, n/30 and the shipping terms are FOB shipping point.

Page 7: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 7

Paying for Freight-In on Purchases

On August 3, Marcia receives and pays the $22 freight bill on the dresses purchased on August 1.

Page 8: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 8

Returning Inventory to a Supplier

On August 5, Marcia’s Boutique returned a dress to Kwon because the dress had a fabric flaw.

Page 9: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 9

Selling Inventory to a Customer

Marcia’s Boutique sells three dresses for cash ($110 per dress) on August 7. Because the company uses a perpetual inventory system, two journal entries are required.

Page 10: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 10

Accepting Returns of Inventory from a Customer

On August 8, one customer who bought a dress on August 7 decided to return it. Marcia’s Boutique will prepare two journal entries to record the return.

Page 11: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 11

Paying on Account for Purchases of Inventory

On August 11, Marcia’s paid for the dresses purchased from Kwon. The credit terms allow Marcia’s Boutique to deduct 2% from the total amount owed if payment is made by August 11.

Page 12: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 12

Inventory Cost Flow Methods

•Specific Identification•First In First Out•Last In First Out

•Weighted Average

Page 13: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 13

Cost Flow Example

The operations of University Bookstore are used to explore the topic of inventory costing. Following are inventory data for January for a Principles of Marketing textbook. The text is a paperback version and, thus, there are no used copies of the text available for sale. To simplify the example, it is assumed that University Bookstore is only open two days in January; all sales, therefore, occur on those two days.

 1/ 1 Beginning inventory 100 copies @ $30 each $ 3,0001/ 8 Purchased 400 copies @ $35 each 14,0001/14 Sold 360 copies1/18 Purchased 70 copies @ $39 each 2,7301/22 Sold 180 copies

Page 14: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 514

Item: Principles of Marketing, Perpetual Inventory Record, FIFO Method

  Purchases Sold Balance 

Date #

UnitCost

 Total

 #

UnitCost

 Total

 #

Unit Cost

 Balance

Jan. 1             100 $30 $3,000

Jan. 8 400 $35 14,000        100400500

 $30 35

  $ 3,000 14,000$17,000

Jan. 17

      100260

$30 35

$3,000

$9,100

 140

  $35

   $4,900

Jan. 18

70 $39 $2,730       140 70210

 $35 39

  $4,900 2,730 $7,630

Jan. 22

      140 40

$35 39

$4,900 $1,560

  30

  $39

   $1,170

Page 15: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 515

Item: Principles of Marketing, Perpetual Inventory Record, Perpetual LIFO

  Purchases Sold Balance 

Date #

UnitCost

 Total

 #

UnitCost

 Total

 #

Unit Cost

 Balance

Jan. 1             100 $30 $3,000

Jan. 8 400 $35 $14,000        100400500

 $30 35

 $ 3,000 14,000$17,000

Jan. 17

      360 $35 $12,600 100 40

 $30 35

$ 3,000 1,400 $4,400

Jan. 18

70 $39 $2,730       100 40 70210

 $30 35 39

$3,000 1,400 2,730 $7,130

Jan. 22

      70 40 70

$39 35 30

$2,730 1,400 2,100

 30

   $30

 $ 900

Page 16: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 516

  Item: Principles of Marketing, Perpetual Inventory Record, Moving Average Method

  Purchases Sold Balance

 

Date #

UnitCost

 Total

 #

UnitCost

 Total

 #

Unit Cost

 Balance

Jan. 1             100 $30 $ 3,000

Jan. 8 400 $35 $14,000

       500

  

 $17,000

Jan. 17

      360 $34 $12,240 140

 $34

 $ 4,760

Jan. 18

70 $39 $2,730       210

  

 $ 7,490

Jan. 22

      180

$35.67

$6,421 30

 $35.67

 $ 1,069

Page 17: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 17

Cost of Goods Sold, Gross Profit and Inventory Amounts

Page 18: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 18

Cost Flow

Page 19: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 19Chapter 5 19

Compute the ending inventory for Rayborn Company using the LIFO perpetual method based on the following information. On January 1 Rayborn Company had 25 units at a cost of $50 each.

Date Purchases Sales

Feb. 10 20 units @ $56

April 5 32 units

June 19 26 units @ $60

Aug. 29 15 units

Nov. 10 10 units @ $63

Page 20: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 20

Date Purchases Sales Balance

Jan. 1 25 @ $50 = $1,250

Feb. 10 20 @ $56 = $1,120 25 @ $50 = $1,250

20 @ $56 = $1,120

April 5 20 @ $56 = $1,120

12 @ $50 = $600 13 @ $50 = $650

June 19 26 @ $60 = $1,560 13 @ $50 = $650

26 @ $60 = $1,560

Aug. 29 15 @ $60 = $900 13 @ $50 = $650

11 @ $60 =$660

Nov. 10 10 @ $63 = $630 13 @ $50 = $650

11 @ $60 = $660

10 @ $63 = $630

Total ending inventory = $1,940

Page 21: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 21

Retail Inventory Method

• Often used in small businesses to estimate the amount of inventory on hand.

• Should be a consistent relationship between the costs and selling prices of a company’s products.

• Can be used with FIFO, LIFO, or average cost flow assumptions.

Page 22: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 22

Retail Inventory Method Illustrated

Page 23: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 23

Lower of Cost or Market

ITEM727 Jeans757 JeansTank tops Pullovers

Quantity30205040

Unit Cost14241518

ReplacementCost

18172014

Total Cost 420 480 750 7202,370*

Total Market 540 3401000 5602440

LCM 420 340 750 5602,070**

*Applying LCM on a total inventory basis

**Applying LCM on an Item by Item basis

Page 24: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 24

Effects of Inventory Errors

Inventory

Cost of Goods Sold

Current Year Next Year

Ending - overstated

Overstated

Understated

Net Income

Beginning - overstated

Overstated

Understated

Ending - understated

Overstated

Overstated

Understated

Understated

Beginning - overstated

Page 25: Chapter 51 Inventory. Chapter 52 Comparison of Perpetual and Periodic Inventory Systems

Chapter 5 25

Relevant RatiosInventory Turnover Ratio = Cost of Goods Sold ÷ Average Inventory

Age of Inventory = 360 days ÷ Inventory Turnover Ratio

The inventory turnover ratio indicates the number of times that a company sells or "turns over" its inventory each year.

Inventory age indicates the average period required to sell an item of inventory.