1. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 6 Objectives 1.Define accounting terms related to planning and costing inventory. 2.Identify accounting concepts and practices related to planning, counting, and costing inventory. 3.Describe the nature of merchandise inventory. 1 LESSON 6-1

2. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Chapter 6 Objectives 4.Determine the cost of merchandise inventory using selected costing methods. 5.Estimate the cost of merchandise inventory using selected estimating methods. 6.Calculate merchandise inventory turnover ratio and average number of days’ sales in merch. inventory. 2 LESSON 6-1

3. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning LESSON 6-1 The Nature of Merchandise Inventory

4. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Merchandise Inventory The largest asset for a merchandising business is Merchandise Inventory! The items on the racks and shelves. Delicate Balance: Too MUCH inventory can cause a business to fail for wasting money on what is NOT selling. Too LITTLE inventory can cause a business to fail for not having adequate supply and having customers look elsewhere. Managers need accurate inventory valuation information to make key decisions. Looking for selling trends Seasonal trends What and when to have items on shelves 4 LESSON 6-1

5. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 5 LESSON 6-1 Cost of Merchandise Available for Sale Beginning Merchandise Inventory Net Purchases Ending Merchandise Inventory Cost of Merchandise Sold FLOW OF INVENTORY COSTS page 171 Merchandise is continually being purchased and sold therefore the actual inventory changes DAILY. Beginning Ending PLUS Current Asset Affects Net Income

6. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 6 LESSON 6-1 EFFECTS OF ERRORS IN COSTING AN INVENTORY page 171

7. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Two Methods to Determine Inventory 1.Periodic Inventory—all goods in inventory as of a given date are counted, weighed or measured. Usually done once or twice a year. “Taking Inventory” 2.Perpetual Inventory—a continuous merchandise record showing number purchased and the number sold. Computerized system allows you to know inventory at any point in time. 7 LESSON 6-1

8. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Goods in Transit (being shipped) How do you count those items that are in the process of being shipped?? Must know terms of sale FOB (Free on Board) Shipping Point—the BUYER pays the transportation charges therefore Title to goods passes to buyer as soon as vendor delivers the goods to a transportation business. They are part of the BUYER’S Inventory 8 LESSON 6-1

9. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Goods in Transit (being shipped) FOB (Free on Board) Destination—the VENDOR pays the transportation charges therefore Title to goods passes to buyer when the buyer RECEIVES the goods They are part of the VENDOR’S Inventory BUYER would not include in their inventory 9 LESSON 6-1

10. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Goods on Consignment Consignment—Goods that are given to a business to sell BUT for which title REMAINS with the vendor. Concept similar to consignment shops. Items are sold on consignment. Consignee—the person or business that RECEIVES goods on consignment. Usually receives commission for selling items. NOT included in their inventory!!! May possibly include as a footnote to balance sheet. Consignor—the person or business that GIVES goods on consignment. Items are still included in their inventory although at another location. 10 LESSON 6-1

11. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Stock Record for a Perpetual Inventory Stock Record—a form showing the type of merchandise, quantity received, quantity sold, and balance on hand. Also shows notation for minimum balance at which to reorder. Unit prices NOT listed on this form. Stock Ledger—a file of stock records for ALL the merchandise on hand. Purchase Order—a completed form authorizing a seller to deliver goods with payment to be made later. 11 LESSON 6-1

12. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 12 LESSON 6-1 4 1 4.Enter all purchase transactions. 3.Record all sales transactions. STOCK RECORD FOR A PERPETUAL INVENTORY SYSTEM page 173 1.Record the description information. 2.Write the beginning quantity. 3 2

13. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 13 LESSON 6-1 1.Enter inventory date and item description. 2.Record stock numbers and descriptions. 3.Write the number of units on hand. 4.Record the unit price. 5.Calculate and record the total item cost. 6.Total the column. INVENTORY RECORD USED FOR THE PERIODIC INVENTORY page 174 345 6 22 11 Inventory Record—a form used during a periodic inventory to record information about each item of merchandise on hand. Compare this against the perpetual inventory record.

14. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning 14 LESSON 6-1 TERMS REVIEW consignment consignee consignor stock record stock ledger purchase order inventory record page 175

15. CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning Audit Your Understanding 1.What two elements are included in the cost of merchandise available for sale? 2.If ending merchandise inventory is understated, will the net income be overstated or understated? 3.Name two ways to determine the number of inventory items on hand. 15 LESSON 6-1