© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved.1

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 1



Important Announcements

• Exam next ween in first discussion groups on Tu/W

• Be on time! (early)• Provide pencils, calculators

(no cell phones)• Voluntary review (tentative) Sunday at

3 p.m. (announced officially later this week)

• Will go over exam on Thur/Fri; need to be present to learn score


Inventory SystemsInventory Systems

periodic

perpetual


Perpetual InventoryPerpetual Inventory• Continuously discloses inventory on hand• increases in inventory debited to Merchandise Inventory

(and posted to subsidiary ledger)• two entries to record sales transactions REVENUE: Accounts Receivable -- Customer retail Sales retail

REDUCTION IN INVENTORY:Cost of Goods Sold cost

Merchandise Inventory cost• physical inventory still needed annually to compare with

and update inventory records


Periodic InventoryPeriodic Inventory• increases recorded in Purchases• at time of sale, record revenue

but no entry for reduction in inventory

• physical inventory (actual count) necessity at end of period to determine cost of goods sold


Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice



item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count









– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two









• shipping terms determine when title passes





• shipping terms determine when title passes– FOB SP


Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it


• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped





• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped– FOB D





• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped– FOB D -- title passes when goods arrive

BUYER

D

Mack’s Trucking


Importance of Importance of InventoryInventory

• most active element of a merchandising business

• principal source of revenue

• largest current asset• largest deduction

from revenue


P

EI

BI


COGSGAFS

To Balance Sheet

To IncomeStatement



Inventory Net Income Assets Capital

Effects of Misstatement


Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost FlowFlow

•in order expenditures were made


Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost FlowFlow

•in order expenditures were made -- FIFO


Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow


•in reverse order in which expenditures were made




•in reverse order in which expenditures were made -- LIFO




•in reverse order in which expenditures were made -- LIFO

•average of expenditures


Balance Sheet Income Statement

MI COGS

First In … First OUTLatest I

tems Left O

ver Time Time Time Time Time Time Time Time Time



MI COGS

Las

t In

Firs

t OU

TOldest Items Left

Time Time Time Time Time Time Time Time Time



MI COGS

FIFO LIFO FIFO LIFO

Rising Prices

NI

Time Time Time Time Time Time Time Time Time


InventoryInventory

Exercises


InventoryInventory


InventoryInventory


Documents

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved.1