1. Copyright © 2007 Prentice-Hall. All rights reserved 1 Accounting for Inventory in a Periodic System Chapter 6 - Appendix

2. Copyright © 2007 Prentice-Hall. All rights reserved 2 Periodic System Company keeps no running record of inventory on hand At the end of each accounting period, determine the cost of ending inventory by taking a physical count Appropriate for a small business

3. Copyright © 2007 Prentice-Hall. All rights reserved 3 Recording Purchases Purchases –Record purchases of inventory –Debit balance Purchases Discounts –When company pays within discount period –Contra account to Purchases –Credit balance

4. Copyright © 2007 Prentice-Hall. All rights reserved 4 Recording Purchases Purchases Returns & Allowances –When company returns inventory to vendor –Contra account to Purchases –Credit balance Transportation-in –To record transportation costs paid on inventory purchased –Debit balance Note: In a perpetual system, the Inventory account is used instead of all these other accounts

5. Copyright © 2007 Prentice-Hall. All rights reserved 5 Recording Sales Record debit to cash or accounts receivable Record credit to sales revenue Do not record cost of goods sold entry

6. Copyright © 2007 Prentice-Hall. All rights reserved 6 E6A-2E6A-2 General Journal DateAccount Titles and DescriptionPRDr.Cr. a.Purchases1,180 Accounts Payable1,180 Purchase on account b.Accounts Receivable3,000 Sales Revenue3,000 Sold inventory on account

7. Copyright © 2007 Prentice-Hall. All rights reserved 7 E6A-2E6A-2 General Journal DateAccount Titles and DescriptionPRDr.Cr. c (1)Cost of Goods Sold540 Inventory (beginning)540 Transfer beginning inventory to cost of goods sold

8. Copyright © 2007 Prentice-Hall. All rights reserved 8 E6A-2E6A-2 General Journal DateAccount Titles and DescriptionPRDr.Cr. c (2)Inventory (ending)590 Cost of Goods Sold590 Record ending inventory based on physical count

9. Copyright © 2007 Prentice-Hall. All rights reserved 9 E6A-2E6A-2 General Journal DateAccount Titles and DescriptionPRDr.Cr. c (3)Cost of Goods Sold1,180 Purchases1,180 Transfer purchases to cost of goods sold

10. Copyright © 2007 Prentice-Hall. All rights reserved 10 E6A-2E6A-2 General Journal DateAccount Titles and DescriptionPRDr.Cr. c (4)Income Summary1,130 Cost of Goods Sold1,130 Close cost of goods sold

11. Copyright © 2007 Prentice-Hall. All rights reserved 11 Net Purchases Purchases -Purchases Returns & Allowances -Purchases Discounts Net Purchases

12. Copyright © 2007 Prentice-Hall. All rights reserved 12 Cost of Goods Sold Beginning Inventory + Net Purchases + Transportation-in Cost of Goods Available for Sale - Ending Inventory Cost of Goods Sold

13. Copyright © 2007 Prentice-Hall. All rights reserved 13 First in, First out Method Assume that the goods acquired earliest are sold first Ending inventory valued at most recent invoice costs

14. Copyright © 2007 Prentice-Hall. All rights reserved 14 First in, First out Method At end of month, 8 units on hand 3 $80 $240 5 $70 $350 8$590 5 70 350 18 $1,130 Cost of Goods Sold It can be easy to confuse FIFO with LIFO. Talk it out. “FIFO”: The first items in are the first items SOLD. What is left on the shelf are the newer purchases

15. Copyright © 2007 Prentice-Hall. All rights reserved 15 Last in, First out Method Assume that the goods most recently acquired are sold first Ending inventory valued at earliest invoice costs

16. Copyright © 2007 Prentice-Hall. All rights reserved 16 Last in, First out Method At end of month, 8 units on hand 8 $60 $480 1 $60 60 Cost of Goods Sold 18 $1,240 Talk it out. “LIFO”: The LAST items in are the first items SOLD. What is left on the shelf are the older purchases

17. Copyright © 2007 Prentice-Hall. All rights reserved 17 Weighted-Average Method Average unit cost = Cost of goods available for sale Number of units available for sale

18. Copyright © 2007 Prentice-Hall. All rights reserved 18 Average Cost Average Unit Cost = $1,720/ 26 = $66.15 Ending Inventory = 8 units x $66.15 = $529* *Rounded Cost of Goods Sold = 18 units x $66.15 = $1,191*

19. Copyright © 2007 Prentice-Hall. All rights reserved 19 End of Appendix 6