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					Chapter 5
 Inventory




    Chapter 5   1
Comparison of Perpetual and
Periodic Inventory Systems




           Chapter 5          2
Inventory Accounting Terms
  •   Sales
  •   Sales Returns and Allowances
  •   Sales Discounts
  •   Purchase Returns and
      Allowances
  •   Purchase Discounts
  •   Freight-In
  •   Delivery Expense(Freight-out)
  •   Cost of Goods Sold
                  Chapter 5           3
      Shipping Terms
FOB Shipping Point: Buyer pays to get
the goods to the destination.

FOB Destination: Seller pays to get the
goods to the destination.

                 Chapter 5            4
 Accounting for Common Inventory
           Transactions
Six common transactions are related to
accounting for inventory:
a. Purchasing inventory from a supplier
b. Paying for freight on purchases
c. Returning inventory to a supplier
d. Selling inventory to a customer
e. Accepting returns of inventory from a customer
f. Paying on account for purchases of inventory

The next few slides will show examples of journal entries for
the above transactions.
                            Chapter 5                           5
     Purchasing Inventory From a
              Supplier
On August 1, Marcia’s Boutique purchased 12 dresses at $50
each from a supplier, Kwon, Inc. The credit terms are 2/10,
n/30 and the shipping terms are FOB shipping point.




                          Chapter 5                       6
Paying for Freight-In on Purchases

On August 3, Marcia receives and pays the $22 freight bill
on the dresses purchased on August 1.




                          Chapter 5                          7
Returning Inventory to a Supplier

On August 5, Marcia’s Boutique returned a dress to Kwon
because the dress had a fabric flaw.




                        Chapter 5                         8
 Selling Inventory to a Customer
Marcia’s Boutique sells three dresses for cash ($110 per
dress) on August 7. Because the company uses a perpetual
inventory system, two journal entries are required.




                          Chapter 5                        9
Accepting Returns of Inventory from
           a Customer
On August 8, one customer who bought a dress on August 7
decided to return it. Marcia’s Boutique will prepare two
journal entries to record the return.




                         Chapter 5                         10
Paying on Account for Purchases of
            Inventory
On August 11, Marcia’s paid for the dresses purchased from
Kwon. The credit terms allow Marcia’s Boutique to deduct
2% from the total amount owed if payment is made by
August 11.




                          Chapter 5                          11
Inventory Cost Flow Methods

    •Specific Identification
       •First In First Out
       •Last In First Out
      •Weighted Average

             Chapter 5         12
                   Cost Flow Example
      The operations of University Bookstore are used to explore the topic of inventory costing. Following
are inventory data for January for a Principles of Marketing textbook. The text is a paperback version and,
thus, there are no used copies of the text available for sale. To simplify the example, it is assumed that
University Bookstore is only open two days in January; all sales, therefore, occur on those two days.

     1/ 1 Beginning inventory 100 copies @ $30 each                              $ 3,000
     1/ 8 Purchased                400 copies @ $35 each                          14,000
     1/14 Sold                     360 copies
     1/18 Purchased                70 copies @ $39 each                            2,730
     1/22 Sold                     180 copies




                                                   Chapter 5                                       13
Item: Principles of Marketing, Perpetual Inventory Record, FIFO Method

              Purchases                Sold                      Balance
                Unit                   Unit                       Unit
Date      #     Cost   Total     #     Cost       Total     #     Cost   Balance

Jan. 1                                                     100   $30     $3,000

Jan. 8   400    $35    14,000
                                                           100   $30     $ 3,000
                                                           400    35      14,000
                                                           500           $17,000
Jan.                            100    $30        $3,000
17                              260     35
                                                           140   $35     $4,900
Jan.     70      $39   $2,730                     $9,100
18                                                         140   $35     $4,900
                                                            70    39      2,730
                                                           210           $7,630
Jan.                            140    $35        $4,900
22                               40     39        $1,560
                                                           30    $39     $1,170
                                                                              14
                                      Chapter 5
       Item: Principles of Marketing, Perpetual Inventory Record, Perpetual LIFO

                 Purchases                Sold                        Balance
                   Unit                    Unit                        Unit
Date         #     Cost    Total     #     Cost       Total      #     Cost   Balance

Jan. 1                                                          100   $30     $3,000

Jan. 8     400     $35    $14,000                               100           $ 3,000
                                                                400   $30      14,000
                                                                500    35     $17,000

Jan.                                360   $35         $12,600                 $ 3,000
17                                                              100   $30       1,400
                                                                 40    35     $4,400

Jan.        70     $39    $2,730                                100    $30    $3,000
18                                                               40     35     1,400
                                                                 70     39     2,730
                                                                210           $7,130
Jan.                                70     $39        $2,730
22                                  40      35        1,400     30            $ 900
                                    70      30        2,100            $30
                                                                                       15
                                          Chapter 5
  Item: Principles of Marketing, Perpetual Inventory Record, Moving Average
                                     Method
              Purchases                Sold                       Balance
                Unit                   Unit                        Unit
Date      #     Cost   Total     #     Cost        Total     #     Cost    Balance

Jan. 1                                                      100   $30      $ 3,000


Jan. 8   400    $35    $14,00
                       0                                    500            $17,000

Jan.                            360   $34         $12,240
17                                                          140   $34      $ 4,760

Jan.     70      $39   $2,730
18                                                          210            $ 7,490

Jan.                                  $35.6       $6,421
22                              180   7                     30    $35.67   $ 1,069
                                                                               16
                                      Chapter 5
Cost of Goods Sold, Gross Profit and
         Inventory Amounts




                Chapter 5          17
Cost Flow




   Chapter 5   18
Compute the ending inventory for Rayborn Company using
the LIFO perpetual method based on the following
information. On January 1 Rayborn Company had 25 units
at a cost of $50 each.
 Date      Purchases        Sales
 Feb. 10   20 units @ $56
 April 5                    32 units
 June 19   26 units @ $60
 Aug. 29                    15 units
 Nov. 10   10 units @ $63




                               Chapter 5                 19
Date      Purchases           Sales               Balance
Jan. 1                                            25 @ $50 = $1,250


Feb. 10   20 @ $56 = $1,120                       25 @ $50 = $1,250
                                                  20 @ $56 = $1,120
April 5                       20 @ $56 = $1,120
                              12 @ $50 = $600     13 @ $50 = $650

June 19   26 @ $60 = $1,560                       13 @ $50 = $650
                                                  26 @ $60 = $1,560

Aug. 29                       15 @ $60 = $900     13 @ $50 = $650
                                                  11 @ $60 =$660

Nov. 10   10 @ $63 = $630                         13 @ $50 = $650
                                                  11 @ $60 = $660
                                                  10 @ $63 = $630
                                                  Total ending inventory = $1,940


                                      Chapter 5                                     20
      Retail Inventory Method
• Often used in small businesses to estimate
  the amount of inventory on hand.
• Should be a consistent relationship between
  the costs and selling prices of a company’s
  products.
• Can be used with FIFO, LIFO, or average
  cost flow assumptions.

                    Chapter 5               21
Retail Inventory Method Illustrated




               Chapter 5              22
       Lower of Cost or Market
                                                      Total
                               Replacement Total Cost Market LCM
ITEM        Quantity Unit Cost Cost          420       540     420
727 Jeans   30       14        18            480       340     340
757 Jeans   20       24        17            750      1000     750
Tank tops   50       15        20            720       560     560
Pullovers   40       18        14          2,370*     2440   2,070**


              *Applying LCM on a total inventory basis


              **Applying LCM on an Item by Item basis

                                Chapter 5                    23
    Effects of Inventory Errors
              Current Year                Next Year

             Ending - overstated    Beginning - overstated
Inventory
             Ending - understated   Beginning - overstated


 Cost of     Understated            Overstated
Goods Sold   Overstated             Understated


  Net        Overstated             Understated
 Income      Understated            Overstated


                      Chapter 5                              24
          Relevant Ratios
Inventory Turnover Ratio =
 Cost of Goods Sold ÷ Average Inventory
The inventory turnover ratio indicates the number of times that a
company sells or "turns over" its inventory each year.

Age of Inventory =
360 days ÷ Inventory Turnover Ratio
Inventory age indicates the average period required to sell an
item of inventory.
                             Chapter 5                           25

				
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