2. 15 - 1 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Accounting for Merchandise Inventory Chapter 15

3. 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

4. 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

5. 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.

6. 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 Inventory Merchandise Inventory250 Accounts Payable250 To record the purchase of inventory

7. 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)

8. 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)

9. 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 Receivable150 Sales Revenue150 Cost of Goods Sold 75 Merchandise Inventory 75

10. 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)

11. 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)

12. 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.

13. 15 - 12 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Maintaining a subsidiary ledger for inventory. Learning Objective 2

14. 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. 15 - 14 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 15-2 (Using a Subsidiary Ledger) Date6/26/36/56/6Purchased 10 @ $25 1 @ $25 1 @ $25Sold 3 @ $25 1 @ $25 Balance$250$175$200$175 A-I-B Software

16. 15 - 15 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater Learning Unit 15-2 (Using a Subsidiary Ledger) Date1/011/121/191/25Units10CostperUnit60TotalFWD600 Item: VX113 Units28CostperUnit5050Total100400Units14121210 410CostperUnit505050605060Total $ 700 600 600 1,200 1,200 800 800 ReceivedSoldBalance Balance

17. 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

18. 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)

19. 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. Units10 920 544Cost$10 12 12 13 13 15 15Total$100 108 108 260 260 75 75$543 Goods Available for Sale Units 6 612Cost$12 13 13Total $ 72 78 78$150 Calculating Cost of Ending Inventory Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543 150 150$393

20. 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. Units10 920 544Cost$10 12 12 13 13 15 15Total$100 108 108 260 260 75 75$543Units 7512Cost$13 15 15Total $ 91 75 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 $543 166 166$377

21. 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. Units10 920 544Cost$10 12 12 13 13 15 15Total$100 108 108 260 260 75 75$543Units10 212Cost$10 12 12Total$100 24 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 $543 124 124$419

22. 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. Units10 920 544Cost$10 12 12 13 13 15 15Total$100 108 108 260 260 75 75$543 Goods Available for Sale Cost of goods available for sale Less: Cost of ending inventory = Cost of goods sold $543.00 148.08 148.08$394.92 $543 ÷ 44 = $12.34 (weighted-average cost per unit) 12 rakes × $12.34 = $148.08

23. 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.

24. 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

25. 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% $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 $6,000 ×.60$ 3,600

26. 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 Net sales at retail$6,000 Cost percentage (100% – 30%).70 Cost percentage (100% – 30%).70 Estimated cost of goods sold 4,200 Estimated inventory, January 31, 20xx$ 9,800

27. 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 overstated Overstated

28. 15 - 27 © 2004 Prentice Hall Business Publishing, College Accounting: A Practical Approach, 9e by Slater End of Chapter 15