Chapter 8Expenditure and Inventory Process

Bellringer: What are the 4 Activities in the

Expenditure Process?

Essential Questions: How do companies keep track of

their inventories they sell?

How do companies record the cost of their inventories?

Enduring Understandings: A company must have an

information system that captures data needed to report the effects of accounting events and to provide information to management

Why? To plan and control the activities of a business.

Enduring Understandings: Whether you use a Perpetual or

Period Inventory System to track your inventory…….

Whether you use the Gross Method or Net Price Method to record your inventory…….

The of inventory is the VALUE SAME

Objectives:Describe the difference through

comparing and contrasting between the periodic and perpetual inventory systems.

Calculate and record inventory activities using each system.

Discuss the difference between the net price and gross price methods for recording inventory.

Calculate and record inventories using each method (gross vs. net)

Bellringer: Which of the following

expenditure process activities are considered an accounting event?◦Determine the need for goods and

services◦Select suppliers and Order

goods/services◦Receive goods/services◦Pay suppliers of goods/services

Merchandising Vs. Manufacturing ? Inventory purchased

to be resold – BUY

The Account for Inventory is called,

“Merchandise Inventory” OR“Inventory”

◦ Ex. Clothes

Inventory purchased to be used to MAKE products

The Account for Inventory is called,

“Direct Materials Inventory”◦ Ex. IPhone – plastic

cases“Or Purchases”

◦ glue

Decision # 1 - How do companies keep track of their inventories they sell?

PERPETUALDetermine cost of

goods sold and ending inventory on a continuous basis

“Running Balance”Typically MORE

expensive items

Ex. Cars, Jewelry, Computers

PERIODICDetermine ending

inventory and cost of goods sold at the end of the period

Specific points in time

Typically LESS expensive items

EX. – Grocery stores, Dollar store items

Decision # 1 - How do companies keep track of their inventories they sell?

PERPETUALPurchases –

◦ “Inventory Account”

Returns and Allowances “Inventory Account”

Freight (or insurance)◦ “Inventory Account”

Discounts of ◦ “Inventory Account”

PERIODICPurchases-

“Purchases Account”

Returns and Allowances “Purchases and

Returns Account”Freight (or insurance)

◦ “Freight-in” or Insurance”

Discounts of ◦ “Purchase Discounts”

Decision # 2 - How do companies record the cost of their inventories?

ABC Company buys $9,000 of inventory with terms 2/10, n/30

PERPETUALDr. Inventory $9,000 Cr. Acct. Payable $9,000

Inventory $9,000

PERIODICDr. Purchases $9,000 Cr. Acct. Payable

$9,000

Purchases $9,000

Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain

the inventoryPERPETUAL

Dr. Inventory $200 Cr. Acct. Payable $200

Inventory $9,000 $200

PERIODICDr. Freight-in 200 Cr. Cash $200

Purchases Freight-in$9,000 $200

Decision # 2 - How do companies record the cost of their inventories?

ABC returns $800 of inventory because it is the wrong order

PERPETUALDr. Acct. Payable $800 Cr. Inventory $800

Inventory $9,000 $800 $200

PERIODICDr. Acct. Payable $800 Cr. Purchase returns and

allowances $800 Purchases Freight – in

$9,000 $200

Purchase Returns and Allowances

$800

Decision # 2 - How do companies record the cost of

their inventories?ABC pays for the inventoryPERPETUAL

Dr. Acct. Payable $8,200 Cr. Cash $8,200

Accounts Payable $800 $9,000

$8,200 $8,200

$0.00

PERIODICDr. Acct. Payable $8,200 Cr. Cash $8,200

Accounts Payable $800 $9,000 $8,200 $8,200 $0.00

With a perpetual system all events that affect the inventory are recorded as increases or decreases to:

A. Purchases AccountB. Inventory AccountC. Separate temporary accounts

depending on transaction: Purchases, Returns and Allowances, Freight

With a periodic system all events that affect the inventory are recorded as increases or decreases to:

A. Purchases AccountB. Inventory AccountC. Separate temporary accounts

depending on transaction: Purchases, Returns and Allowances, Freight

Which system must we make an adjustment for at the end of the period?A. Periodic Inventory

B. Perpetual Inventory

Why must we make an inventory adjustment using the periodic method at the end of the period?

A. To update our inventory records for a current balance.

B. To update our inventory for items stolen or lost.

Independent Practice:Homework

A. Read 222-225B. E8.6, 8.7

Decision # 2 - How do companies price (record) their inventories they sell? Total Cost of inventory = Full purchase price of inventory +Freight paid to receive inventory + Insurance paid on the inventory

while in transit.

Decision # 2 - How do companies price (record) their inventories they sell?

GROSS PRICEFull Cost (total cost)Assumption:

Discounts, when received are reductions in the purchase price of inventory

Purchase discount recorded …..

WHEN TAKEN

NET PRICEDiscounted Cost

(total cost less discount available)

Assumption: ALL Discounts should be taken.

Cost of inventory is the minimum amount due to the supplier.

Decision # 2 - How do companies price (record) their inventories they sell?

GROSS PRICE NET PRICEIf company,

FAILS to take the discount, the extra amount is a “finance charge” and is recorded as “DISCOUNTS LOST”

Decision # 2 - How do companies record the cost of their inventories?

ABC Company buys $9,000 of inventory with terms 2/10, n/30

PERIODIC - GROSS PRICE

Dr. Purchases $9,000 Cr. Acct. Payable $9,000

Purchases $9,000

PERIODIC-NET PRICE

Dr. Purchases $8,820 Cr. Acct. Payable

$8,820(9,000 X 98% = 8,820)

Purchases $8,820

Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain

the inventoryPERIODIC

GROSS PRICEDr. Freight-in $200 Cr. Cash $200

Freight-in $200

PERIODICNET PRICE

Dr. Freight-in 200 Cr. Cash $200

Freight-in $200

Decision # 2 - How do companies record the cost of their inventories?

ABC returns $800 of inventory because it is the wrong order

PERIODICGROSS PRICE

Dr. Acct. Payable $800 Cr. Purchase returns and

allowances $800

Purchase Returns

and Allowances $800

PERIODICNET PRICE

Dr. Acct. Payable $784 Cr. Purchase returns and

allowances $784 (800 X 98% = 784) Purchase Returns and Allowances

$784

Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory within

the discount periodPERIODIC

GROSS PRICEDr. Acct. Payable $8,200 Cr. Purchase Discount $164

Cr. Cash $8,036 Accounts Payable $9,000

$800 $8,200 $8,200 $0.00

PERIODICNET PRICE

Dr. Acct. Payable $8,036 Cr. Cash $8,036

Accounts Payable $8,820 $784 $8,036 $8,036 $0.00

What is the Balance in Inventory under Each Pricing Method? With Discount Taken….

Net price◦Purchases $8,820 ◦Returns and Allowances - 784◦Ending value inventory $8,036

Gross price ◦Purchases $9,000 ◦Returns and Allowances - 800◦Discounts - 164◦Ending value inventory $8,036

Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory AFTER

the discount period expired.PERIODIC

GROSS PRICEDr. Acct. Payable $8,200 Cr. Cash $8,200 Accounts Payable $9,000

$800 $8,200 $8,200 $0.00

PERIODICNET PRICE

Dr. Acct. Payable $8,036Dr. Discounts Lost $164 Cr. Cash $8,200

Accounts Payable $8,820 $784 $8,036 $8,036 $0.00

What is the Balance in Inventory under Each Pricing Method? With Discount LOST or NOT TAKEN….Net price

◦ Purchases $8,820 ◦ Returns and Allowances - 784◦ Ending value inventory $8,036

Gross price ◦ Purchases $9,000 ◦ Returns and Allowances - 800◦ Ending value inventory $8,200

Does this mean that the inventory under the gross price method is worth more?◦ No, it simply reflects management’s beliefs concerning

discounts. Gross = cost reduction when taken Net = financing cost when lost

M-3 Sample Problem…..

Independent Practice:Homework

A. Read 222-225B. E8.6, 8.9, E8.10