1. © 2014 Cengage Learning. All Rights Reserved. Learning Objective © 2014 Cengage Learning. All Rights Reserved. LO1Prepare a stock record.

2. © 2014 Cengage Learning. All Rights Reserved. Why Merchandise Inventory Is Important ●Helps managers to maintain a merchandise inventory of sufficient quantity, variety, and price ●Allows current assets and retained earnings to be correctly reported on the balance sheet ●Ensures that gross profit and net income are reported correctly on the income statement SLIDE 2 Lesson 20-1 LO1

3. © 2014 Cengage Learning. All Rights Reserved. The Most Efficient Quantity of Inventory ●Larger than needed ●Requires a business to spend money for store and warehouse space ●Uses capital that could be invested in other assets ●Requires a business to spend money for expenses, such as taxes and insurance premiums, which increase with the cost of the merchandise inventory ●May become obsolete and unsalable SLIDE 3 LO1 Lesson 20-1

4. © 2014 Cengage Learning. All Rights Reserved. The Most Efficient Quantity of Inventory ●Smaller than needed ●Sales may be lost ●Per unit cost of merchandise may be higher for small quantities SLIDE 4 LO1 Lesson 20-1

5. © 2014 Cengage Learning. All Rights Reserved. Methods Used to Determine the Quantity of Merchandise Inventory ●A merchandise inventory evaluated at the end of a fiscal period is known as a periodic inventory. ●A merchandise inventory determined by keeping a continuous record of increases, decreases, and the balance on hand of each item of merchandise is known as a perpetual inventory. ●A perpetual inventory is also referred to as a book inventory. SLIDE 5 LO1 Lesson 20-1

6. © 2014 Cengage Learning. All Rights Reserved. Inventory Record ●A form used during a physical inventory to record information about each item of merchandise on hand is called an inventory record. SLIDE 6 LO1 Lesson 20-1 1 1 Stock Number and Description 2 2 Actual Units on Hand 3 3 Unit Price and Total Cost

7. © 2014 Cengage Learning. All Rights Reserved. Stock Record ●Some businesses keep inventory records that show continuously the quantity on hand for each kind of merchandise. ●A form used to show the kind of merchandise, quantity received, quantity sold, and balance on hand is called a stock record. ●A separate stock record is prepared for each kind of merchandise on hand. ●A file of stock records for all merchandise on hand is called a stock ledger. SLIDE 7 LO1 Lesson 20-1

8. © 2014 Cengage Learning. All Rights Reserved. Stock Record SLIDE 8 LO1 Lesson 20-1 Purchase Information Sales Information New Balance on Hand

9. © 2014 Cengage Learning. All Rights Reserved. Perpetual Inventory Using a Computer ●Point-of-sales terminals ●Universal Product Codes (UPC) ●Computerized stock ledger SLIDE 9 LO1 Lesson 20-1

10. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-1 Audit Your Understanding 1.Identify four reasons why a merchandise inventory that is larger than needed may decrease the net income of a business. SLIDE 10 ANSWER 1.Excess inventory requires that a business spend money for expensive store and warehouse space. 2.Excess inventory uses capital that could be invested in other assets to earn a profit for the business. 3.Excess inventory requires that a business spend money for expenses, such as taxes and insurance premiums, which increase with the cost of the merchandise inventory. 4.Excess inventory may become obsolete and unsalable. Lesson 20-1

11. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-1 Audit Your Understanding 2.When are physical inventories normally taken? SLIDE 11 ANSWER At the end of a fiscal period Lesson 20-1

12. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-1 Audit Your Understanding 3.How do inventory levels affect the period a business selects for its fiscal year? Why? SLIDE 12 ANSWER A business frequently establishes its fiscal period to end when inventory normally is at a minimum because it takes less time to count a smaller inventory. Lesson 20-1

13. © 2014 Cengage Learning. All Rights Reserved. Lesson 20-1 Audit Your Understanding 4.How is the accuracy of a perpetual inventory checked? SLIDE 13 ANSWER A customary practice is to take a physical inventory at least once a fiscal period. The physical inventory results are then compared with the perpetual inventory records. Lesson 20-1