Chapter 22: Accounting for Inventory By: Audrey Marshall

Determining the Quantity of Merchandise Inventory To determine the most efficient quantity of inventory, a business makes frequent analysis of purchases, sales, and inventory records. A merchandise inventory that is either larger or smaller than needed may decrease net income of a business To principal methods are used to determine quantity of each item of merchandise on hand: -periodic inventory: merchandise inventory determined by counting, weighing, or measuring items -perpetual inventory: merchandise inventory determined by keeping continuous record of increases, decreases, and balance on hand

Determining the Quantity of Merchandise Inventory (cont.) Stock record: a form used to show the kind of merchandise, quantity received, quantity sold, and balance on hand Examples: Oct. 22 Received 9 XW142 cable adapters. P321. Nov. 12 Sold 6 XW142 cable adapters. S1816. In the stock record chart, you would write the dates in the date columns for each one, write the purchase invoice no. and the sales invoice no. in the corresponding columns, and then write the new balance on hand in the balance column.

Determining the Cost of Merchandising Inventory The total cost are calculated using the quantities and unit prices recorded Three inventory costing methods can be used: FIFO- using price of merchandise inventory purchased first to calculate the cost of merchandise sold first LIFO- using price of merchandise inventory purchased last to calculate the cost of merchandise sold first Weight-Average- using the cost beginning inventory plus merchandise purchased during a fiscal period to calculate cost of merchandise sold

Using FIFO Enter the total number of units on hand From the most recent purchase, enter the number of units purchased From the next most recent purchase, enter the number of units needed to equal the total units on hand Multiply the unit price of each appropriate purchase times the FIFO units on hand to determine the FIFO cost Add the individual FIFO costs to determine the FIFO cost of the total number of units in ending inventory

Using LIFO Enter the total number of units on hand Enter the number of units in the beginning inventory From the next earliest purchase, enter the number of units purchased From the next earliest purchase, enter the number of units needed to equal the total units on hand Multiply the unit price of the beginning inventory times the LIFO units on hand to determine the LIFO cost for beginning inventory. Repeat for each appropriate purchase. Add the LIFO cost for the beginning and each appropriate purchase to determine the LIFO cost of the total number of units in ending inventory

Using Weight-Average Calculate the total cost of beginning inventory and each purchase by multiplying the units by each unit price To calculate cost of merchandise sold, you subtract FIFO cost of ending inventory from cost of merchandise available for sale

Estimating Inventory Gross profit method of estimating inventory- estimating inventory by using the previous year’s percentage of gross profit on operations It is often used to estimate the cost of the ending inventory reported on monthly financial statements Four values are needed to perform the four-step process: Actual net sales and net purchases amounts obtained from general ledger Beginning inventory amount obtained from prior period’s financial statement Gross profit percentage that is estimated by management based on previous year’s actual percentage