chapter 8 expenditure and inventory process. what are the 4 activities in the expenditure process?...
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Chapter 8Chapter 8Expenditure and Inventory Process
What are the 4 Activities in the Expenditure Process?
◦Determine the need for goods and services
◦Select suppliers and Order goods/services
◦Receive goods/services◦Pay suppliers of goods/services
Essential Questions: Essential Questions: How do companies keep track of
their inventories they sell?
How do companies record the cost of their inventories?
Enduring Understandings: 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: 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
ObjectiObjectives:ves: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)
Merchandising Vs. Merchandising Vs. Manufacturing ?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 Decision # 1 - How do companies keep track of their companies keep track of their inventories they sell?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
Exercises 8.4 and 8.5Exercises 8.4 and 8.5 E8.4 Case 1: $54,000 + $72,000 = $126,000;
$126,000 - $41,000 = $85,000. Case 2: $172,000 + $13,000 = $185,000;
$185,000 - $37,000 = $148,000. Case 3: $88,000 + $26,000 = $114,000;
$114,000 - $67,000 = $47,000. E8.5 Company A: $667,800 + $4,776,200 =
$5,444,000; $5,444,000 - $819,900 = $4,624,100.
Company B: $2,940,700 - $388,200 = $2,552,500; $2,940,700 - $1,457,900 = $1,482,800.
Company C: $534,800 + $163,900 = $698,700; $698,700 - $647,600 = $51,100.
Decision # 1 - How do Decision # 1 - How do companies keep track of their companies keep track of their inventories they sell?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 - Decision # 2 - How do companies How do companies record the cost of their inventories?record the cost of their inventories?
ABC Company buys $9,000 of ABC Company buys $9,000 of inventory with terms 2/10, n/30inventory 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 - Decision # 2 - How do How do companies record the cost of companies record the cost of
their inventories?their inventories?ABC pays $200 of freight to ABC pays $200 of freight to
obtain the inventoryobtain 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 - Decision # 2 - How do How do companies record the cost of companies record the cost of
their inventories?their inventories?ABC returns $800 of inventory ABC returns $800 of inventory because it is the wrong orderbecause 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 - Decision # 2 - How do How do companies record the cost of companies record the cost of
their inventories?their inventories?ABC pays for the inventoryABC 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 With a perpetualperpetual system all system all events that affect the events that affect the inventory are recorded as inventory are recorded as increases or decreases to:increases or decreases to:
A. Purchases AccountB. Inventory AccountC. Separate temporary accounts
depending on transaction: Purchases, Returns and Allowances, Freight
With a With a periodicperiodic system all system all events that affect the events that affect the inventory are recorded as inventory are recorded as increases or decreases to:increases or decreases to:
A. Purchases AccountB. Inventory AccountC. Separate temporary accounts
depending on transaction: Purchases, Returns and Allowances, Freight
Which system must we Which system must we make an adjustment for at make an adjustment for at the end of the period?the end of the period?
A. Periodic Inventory
B. Perpetual Inventory
Why must we make an Why must we make an inventory adjustment using inventory adjustment using the periodic method at the the periodic method at the end of the period?end of the period?
A. To update our inventory records for a current balance.
B. To update our inventory for items stolen or lost.
Decision # 2 - How do Decision # 2 - How do companies price (record) their companies price (record) their inventories they sell?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 Decision # 2 - How do companies price (record) their companies price (record) their inventories they sell?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 Decision # 2 - How do companies price (record) their companies price (record) their inventories they sell?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 - Decision # 2 - How do companies How do companies record the cost of their inventories?record the cost of their inventories?
ABC Company buys $9,000 of ABC Company buys $9,000 of inventory with terms 2/10, n/30inventory with terms 2/10, n/30PERIODIC - 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 - Decision # 2 - How do companies How do companies record the cost of their inventories?record the cost of their inventories?ABC pays $200 of freight to obtain ABC pays $200 of freight to obtain
the inventorythe inventory
PERIODICGROSS PRICE
Dr. 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 Decision # 2 - How do companies record the cost of their inventories?record the cost of their inventories?
ABC returns $800 of inventory ABC returns $800 of inventory because it is the wrong orderbecause 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 Decision # 2 - How do companies record the cost of their inventories?record the cost of their inventories?ABC pays for the inventory within ABC pays for the inventory within
the discount periodthe 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 What is the Balance in Inventory under Each Pricing Method? under Each Pricing Method? With Discount Taken….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 Decision # 2 - How do companies record the cost of their inventories?record the cost of their inventories?ABC pays for the inventory AFTER ABC pays for the inventory AFTER
the discount period expired.the discount period expired.
PERIODICGROSS PRICE
Dr. 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 What is the Balance in Inventory under Each Pricing Method? under Each Pricing Method? With Discount LOST or NOT With Discount LOST or NOT TAKEN….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
Independent Practice:Independent Practice:HomeworkHomework
A. Read 222-225B. E 8.6, 8.7, 8.8, 8.9, E8.10