1. Learning Objectives 1. Identify major classifications of inventory.
2. Distinguish between perpetual and periodic inventory systems.
3. Identify the effects of inventory errors on the financial statements.
4. Identify the items that should be included as inventory cost.

2. Inventory Classification
Inventory consists of:
- finished goods held for sale in the ordinary course of business
- goods held or consumed in the production of finished goods
A merchandising concern has one inventory account
Merchandise Inventory
A manufacturing concern will normally have three inventory accounts:
Raw materials
Work in process
Finished goods

3. Merchandising Operations
Inventory Cost Flows
Merchandising Operations
Merchandise
Inventory
Purchases
COGS
Cost of goods
sold
$$$

4. Inventory Control Inventory control is important for:
- ensuring availability of inventory items
- preventing excessive accumulation of inventory items
The perpetual system maintains a continuous record of inventory changes
The periodic system updates inventory records only periodically

5. Perpetual System
Purchases and sales of inventory recorded directly to Inventory account
Inventory purchases, freight, purchase returns and discounts are debited to the Inventory account
Cost of Goods Sold (COGS) is debited and Inventory is credited for each sale
Subsidiary ledger is maintained for individual inventory items
Periodic inventory counts are still required to ensure reliability

6. Periodic System
Inventory purchases recorded as a debit to Purchases account
COGS is a calculation on the Income Statement
Physical inventory is counted and verified periodically
Under both periodic and perpetual inventory systems, physical counts of inventory are conducted at least once a year
Any differences in counted and recorded quantities are posted to a separate account – Inventory Over and Short

7. Perpetual and Periodic Systems: Example
Fesmire Limited reports the following data for 2000:
Beginning Inventory : 100 units at $6
Purchases: (all credit) March 12: units at $6 July 6: 600 units at $6
Sales: (all credit) April 8: 200 units at $12 August 9: 400 units at $12
Ending Inventory: 400 units at $6
Provide all journal entries under each method.

8. Perpetual System Date Record Inventory Changes Record Sales Revenue
March Inventory 1,800
Accts Payable ,800
April Cost of goods sold , Accts Receiv. 2,400
Inventory Sales ,400
(200 *$6) (200 * $12)
July Inventory ,600
Accts Payable ,600
August 9 Cost of goods sold , Accts Receiv. 4,800
Inventory , Sales ,800
(400 * $6) (400 * $12)

9. Perpetual System Dollar amounts are optional
Inventory Stock Card (Subsidiary Ledger)
Date Purchases Sales Balance
January 1 Opening units
March units 400
April units 200
July units 800
August units 400 units
Dollar amounts are optional
Periodic inventory system would not normally maintain a subsidiary ledger for inventory

10. Periodic System Date Record Inventory Changes Record Sales Revenue
March 12 Purchases 1,800
Accts Payable 1,800
April 8 No entry Accts Receiv 2,400
Sales ,400
July Purchases 3,600
Accts Payable 3,600
August 9 No entry Accts Receiv 4,800
Sales ,800
Dec Cost of goods sold 3,600
Inventory (ending) 2,400 Adjusting
Purchases ,400 Entry
Inventory (beg)

11. Financial Statement Presentation
Perpetual
Periodic
Net Sales $,$$$
Cost of Goods Sold $$$
Gross Profit $,$$$
Net Sales $,$$$
Cost of Goods Sold:
Opening Inventory $$$
Add: Net Purchases $$$
Cost of Goods
Available for Sale
Less: Ending Inventory $$$
Cost of Goods Sold $$$
Gross Profit $,$$$