1. © 2015 Cengage Learning. All Rights Reserved.
LESSON
5-1
Determining
Merchandise Inventory
Quantities
Learning Objectives
LO1 Describe the nature of merchandise inventory.
LO2 Account for the quantity of merchandise inventory.
© 2015 Cengage Learning. All Rights Reserved.

2. The Nature of Merchandise Inventory
Lesson 5-1
The Nature of Merchandise Inventory
LO1
For most merchandising businesses, the cost of inventory sold is the largest cost of doing business.
Merchandising businesses implement good control measures in managing their inventory.
An accurate ending merchandise inventory cost must be determined to report adequately the financial progress and condition of a merchandising business.
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3. Effects of Errors in Costing Merchandise Inventory
Lesson 5-1
Effects of Errors in Costing Merchandise Inventory
LO1
Any error made in costing the ending inventory has a significant effect on the income statement.
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4. Effects of Errors in Costing Merchandise Inventory
Lesson 5-1
Effects of Errors in Costing Merchandise Inventory
LO1
The statement of cash flows is the only financial statement not affected by an error in costing inventory.
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5. Costing and Counting the Inventory
Lesson 5-1
Costing and Counting the Inventory
LO2
The cost of goods includes:
1. The price paid to vendors for the merchandise. This price is the purchase invoice amount less discounts, returns, and allowances granted by the vendors.
2. The cost of getting the goods to the place of business and ready for sale. This cost includes transportation charges paid by the buyer.
Two methods are used to determine the number of goods in inventory:
Taking a physical count, and
Keeping a continuous count using a computer.
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6. © 2015 Cengage Learning. All Rights Reserved.
Lesson 5-1
Goods in Transit
LO2
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7. © 2015 Cengage Learning. All Rights Reserved.
Lesson 5-1
Goods on Consignment
LO2
Goods that are given to a business to sell but for which title remains with the vendor are called a consignment.
The person or business that receives goods on consignment is called the consignee.
The person or business that gives goods on consignment is called the consignor.
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8. Stock Record for a Perpetual Inventory System
Lesson 5-1
Stock Record for a Perpetual Inventory System
LO2
A form used to show the type of merchandise, quantity received, quantity sold, and balance on hand is called a stock record.
A file of stock records for all merchandise on hand is called a stock ledger. 1 2 3 4
1. Record the item description, stock number, reorder quantity, minimum number, and the warehouse location.
2. Record the beginning quantity.
3. Record sales transactions.
4. Enter purchase transactions.
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9. Inventory Record Used for Physical Inventory
Lesson 5-1
Inventory Record Used for Physical Inventory
LO2
A form used during a physical inventory to record information about each item of merchandise on hand is called an inventory record.
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10. Lesson 5-1 Audit Your Understanding
1. What two elements are included in the cost of merchandise available for sale?
ANSWER
a. Cost of the beginning merchandise inventory.
b. Cost of the net purchases added to the inventory during the fiscal year.
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11. Lesson 5-1 Audit Your Understanding
2. If the ending merchandise inventory is understated, will the net income be overstated or understated?
ANSWER
Understated.
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12. Lesson 5-1 Audit Your Understanding
3. Name two ways to determine the number of inventory items on hand. 
ANSWER
a. By physically counting the items.
b. By keeping a continuous record showing the
number purchased and sold for each item.
© 2015 Cengage Learning. All Rights Reserved.