15 - 1 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater

Accounting for
Merchandise Inventory
Chapter 15
15 - 2 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Understanding and journalizing
transactions using the perpetual
inventory system, and explaining
the difference between perpetual
and periodic inventory system.
Learning Objective 1
15 - 3 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
Merchandise Inventory
Cost of Goods Sold
15 - 4 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
The inventory debit balance is the
up-to-date cost of inventory on hand.
Purchased 10 software packages
at a cost of $25 per package.
15 - 5 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
Accounts Payable
250 250
Inventory
Merchandise Inventory 250
Accounts Payable 250
To record the purchase of inventory
15 - 6 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
As goods are sold, the cost of the goods are
debited to the Cost of Goods Sold account
and credited to the Inventory account.
Learning Unit 15-1
(Perpetual Inventory System)
15 - 7 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Debit Cash or Accounts Receivable
Credit Sales Revenue
Debit Cost of Goods Sold
Credit Merchandise Inventory
Learning Unit 15-1
(Perpetual Inventory System)
15 - 8 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
Sold three packages for cash for $150.
Accounts Receivable 150
Sales Revenue 150
Cost of Goods Sold 75
Merchandise Inventory 75
15 - 9 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Debit Inventory
Credit Cost of Goods Sold
(For the cost of the goods returned by customer)
Debit Sales Returns & Allowances
Credit Cash
(For the sales price of the goods returned)
Learning Unit 15-1
(Perpetual Inventory System)
15 - 10 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
Debit Accounts Payable
Credit Inventory
(For the cost of the goods returned to the supplier)
15 - 11 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-1
(Perpetual Inventory System)
The perpetual system gives a day-to-day
picture of sales and the cost of goods sold.
The periodic system shows the proper
balance in inventory at year end only.
15 - 12 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Maintaining a subsidiary
ledger for inventory.
Learning Objective 2
15 - 13 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-2
(Using a Subsidiary Ledger)
Accounting for inventory items becomes
complicated as soon as product lines expand.
Subsidiary ledgers are necessary
to properly track inventory items.
Daily posting (or instant recording through
electronic computerized systems) allow
managers easy access to information.
15 - 14 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-2
(Using a Subsidiary Ledger)
Date
6/2
6/3
6/5
6/6
Purchased
10 @ $25


1 @ $25
Sold

3 @ $25
1 @ $25

Balance
$250
$175
$200
$175
A-I-B Software
15 - 15 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-2
(Using a Subsidiary Ledger)


Date
1/01
1/12
1/19

1/25



Units


10



Cost
per
Unit


60





Total
FWD

600



Item: VX113


Units

2


8

Cost
per
Unit

50


50



Total

100


400



Units
14
12
12
10
4
10
Cost
per
Unit
50
50
50
60
50
60


Total
$ 700
600

1,200

800
Received Sold Balance
Balance
15 - 16 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Understanding periodic methods
of determining the value of
the ending inventory.
Learning Objective 3
15 - 17 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
FIFO
LIFO
Specific invoice
Weighted average
Learning Unit 15-3
(Periodic Inventory System)
15 - 18 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-3
(Specific Invoice Method)

01/01 Beg. Inv.
03/15 Purch.
08/18 Purch.
11/15 Purch.

Units
10
9
20
5
44
Cost
$10
12
13
15

Total
$100
108
260
75
$543
Goods Available
for Sale
Units

6
6

12
Cost

$12
13


Total

$ 72
78

$150
Calculating Cost of
Ending Inventory
Cost of goods available for sale
Less: Cost of ending inventory
= Cost of goods sold
$543
150
$393
15 - 19 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-3
(FIFO Method)

01/01 Beg. Inv.
03/15 Purch.
08/18 Purch.
11/15 Purch.

Units
10
9
20
5
44
Cost
$10
12
13
15

Total
$100
108
260
75
$543
Units


7
5
12
Cost


$13
15

Total


$ 91
75
$166
Goods Available
for Sale
Calculating Cost of
Ending Inventory
Cost of goods available for sale
Less: Cost of ending inventory
= Cost of goods sold
$543
166
$377
15 - 20 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-3
(LIFO Method)

01/01 Beg. Inv.
03/15 Purch.
08/18 Purch.
11/15 Purch.

Units
10
9
20
5
44
Cost
$10
12
13
15

Total
$100
108
260
75
$543
Units
10
2


12
Cost
$10
12

Total
$100
24


$124
Goods Available
for Sale
Calculating Cost of
Ending Inventory
Cost of goods available for sale
Less: Cost of ending inventory
= Cost of goods sold
$543
124
$419
15 - 21 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-3
(Weighted-average Method)

01/01 Beg. Inv.
03/15 Purch.
08/18 Purch.
11/15 Purch.

Units
10
9
20
5
44
Cost
$10
12
13
15

Total
$100
108
260
75
$543
Goods Available
for Sale
Cost of goods available for sale
Less: Cost of ending inventory
= Cost of goods sold
$543.00
148.08
$394.92
$543 44 = $12.34
(weighted-average
cost per unit)

12 rakes $12.34
= $148.08
15 - 22 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-3
(Cost of Inventory Inclusions)
Goods in transit:
Add to inventory if the ownership of the
inventory has been transferred to the buyer.
Merchandise on consignment:
This is not included in the cost of inventory.
Damaged or obsolete merchandise:
If it is not saleable, it should not be included
in the cost of inventory. If saleable, add to
the cost of inventory at a conservative figure.
15 - 23 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Estimating ending inventory
using the retail method and
gross profit method and
understanding how the
ending inventory amount
affects financial reports.
Learning Objective 4
15 - 24 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-4
(Estimating Ending Inventory)
Goods available for sale: Cost Retail
Beginning inventory $ 4,100 $ 6,900
Net purchases 7,900 13,100
Cost of goods available for sale $12,000 $20,000
Cost ratio,
$12,000 $20,000 = 60%
Net sales at retail 14,000
Inventory at retail $ 6,000
Ending inventory at cost,
$6,000 .60 $ 3,600
15 - 25 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-4
(Estimating Ending Inventory)
Goods available for sale:
Inventory, January 1, 20xx $10,000
Net purchases 4,000
Cost of goods available for sale $14,000
Less: Estimated cost of goods sold:
Net sales at retail $6,000
Cost percentage (100% 30%) .70
Estimated cost of goods sold 4,200
Estimated inventory, January 31, 20xx $ 9,800
15 - 26 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
Learning Unit 15-4
(Effect on Financial Reports)
Beginning inventory
Ending inventory
If the Item is
Profit is overstated
Profit is understated
Understated
Profit is understated
Profit is overstated
Overstated
15 - 27 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater
End of Chapter 15