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Types of Inventory

MERCHANDISING Wholesalers Buy from

manufacturers

sell to retailer Retailers Buy from wholesalers

Sell to general public

Acctg 101 Merchandise

Inventory

MANUFACTURING Buy from several

suppliers to make aproduct

Sell to wholesalersand sometimesretailers

Acctg 102 Raw Materials

Work in Process

Finished Goods

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Inventory Normal Balance

Inventory is an asset so its normal balance is aDebit.

To increase inventoryDebit

To decrease inventoryCredit

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Purchases Normal Balance

Purchases is like expense

Purchases is always increased with a debit

Purchase returns and allowancescreditbalance

Purchase discountcredit balance

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Cost of Goods Sold (COGS)

Cost of Goods Sold is an expense so it has adebit balance

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Gross Margin

Sales

-Sales Return and Allowances

-Sales Discount

=Net Sales

-Cost of Goods Sold

=Gross Margin

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Cost of Goods Sold

Beginning Inventory 3000 +Purchases 12000 -Purchase Discount -600 -Purchases Return and Allow -400

+ Net Purchases 11000 + Freight In 1000 =Cost of Merchandise Purchased

10000 =Goods Available for Sale 13000 - Ending Inventory (or Goods not Sold) -

4000

= Cost of Goods Sold 9000

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Brief Exercise 6-3 page 281

Exercise 6-1 page 283

MUST KNOW THIS FORMULA

MEMORIZE IT

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Estimating Inventory-Whyimportant

Sales 150,000

Beginning Inventory 8,000 +Purchases 110,000

-Purchase Discount (1,000)

-Purchases Ret & Allow (2,000)

+ Net Purchases 107,000

Goods Available for Sale 115,000

- Ending Inventory (or Goods not Sold) 15,000 = Cost of Goods Sold 100,000

Gross Margin 50,000

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Overstating/UnderstatingEnding Inventory

Over Under

SALES 150 150

Beg Inventory + Net Purchases Cant Change

=Goods Available 115 115

- Ending Inventory 20 10 = COGS 95 105

=Gross Margin 55 45

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WHAT EVER I DO TO

ENDING INVENTORY,

I ALSO DO TO NET

INCOME

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Two methods to TRACKinventory

Periodic

At some period of time

Perpetual

All the time--- everytime there is a purchase andeverytime there is a sale

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IF YOU KNOWPERIODIC YOU WILLKNOW PERPETUAL

SO LETS DO PERIODICFIRST

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COST

OF ENDING INVENTORY Specific Indentification First in First Out

Last In First Out

Average Cost

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Specific Indentification

Not estimated

Actual items

Or specific identification

Page 252 example

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Last In First Out

COOKIE JAR

Last one purchased first one sold Page 253 Used if want to put replacement cost in Cost of

Goods sold Increasing costs --- higher cost in COGS Lower cost in Ending Inventory so lower net

income BE 6-5 pg 281 IFRSNot used UStax savings

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LIFO RESERVE

Additional amount of inventory a companywould report if it used FIFO instead of LIFO

Cost of Goods Sold

Inventory

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MUST BE CONSISTENT

Cant change inventory methods without IRS

approval.

Can use different type of methods for differenttypes of inventory

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Average Cost

Weighted Average 500@$10, 600@$11,800@$12

$50+$66+$96= 212/19 = $11.16

Used if a lot of little inventory items

BE 6-6 page 281

Costs are evenly distributed in COGS and

Ending Inventory

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Periodic versus Perpetual

Have been using Periodic

Perpetual uses the periodic method every timethere is a sale and every time there is a sale.

Perpetual needs exact dates it was purchasedand sold.

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Recording inventorytransactions Periodic Method

Purchase Purchase

A/P

Sale A/R Sales

Return & Allowance A/P

Purchase Ret and Allowance

Purchase Discount A/P

Cash

Purchase Discount

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Perpetual Method Purchase

Inventory

A/P

Sale

A/R Sales

COGS

Inventory

Return & Allowance A/P

Inventory

Purchase Discount A/P

Cash

Inventory

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Purchase Purchase

A/P

Sale A/R

Sales

Return & Allowance A/P

Purchase Ret and Allowance

Purchase Discount A/P

Cash

Purchase Discount

Purchase Inventory

A/P

Sale A/R

Sales

COGS

Inventory

Return & Allowance A/P

Inventory

Purchase Discount A/P

Cash

Inventory

Periodic Perpetual

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Freight - In

Freight In

Purchases or COGS account

Bringing it into the business

Freight In

A/P

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Freight out

Selling Expense

Cost of Sending it to the customer

Freight Expense

Cash or A/P

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Exercises

6-6 pg 284 Perpetual

6-7 Periodic

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Lower Cost or Market pg 266

Normally Inventory is replacement cost --- costto restock the item after identical items aresold

If Market Value is less than Cost (if what youpaid for the item is less than you can sell it for)

you must make an adjustment. COGS

Inventory

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Exercises

Page 285

6-11

6-12

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Inventory Ratios

Inventory Turnover pg 269 COGS/ Average Inventory

# of Days in Inventory365/ Inventory T/O (Seasons)

6-13 pg 285 Inventory

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Gross Profit Ratio

Gross Profit pg 271Gross Profit/ Net Sales

Exercise 6-14 pg 286

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Homework

Problem 6-2 COGS, Ending Inventory

Problem 6-3 Periodic

Problem 6-4 Perpetual

Problem 6-6 Lower of Cost or Market

Problem 6-8 Ratios