Accounting for Merchandise Inventory pdf

Accounting for
Merchandise Inventory
Chapter 6

Perpetual systems maintain a running record
to show the inventory on hand at all times.
Periodic systems do not keep a
continuous record of inventory on hand.
Inventory Accounting Systems

Compute and record journal
entries for perpetual
inventory amounts under
FIFO, LIFO, and average
cost.
Objectives 1 and 2

Debit Cash or Accounts Receivable
Credit Sales Revenue
Debit Cost of Goods Sold
Credit Inventory
Perpetual System
Debit Inventory
Credit Cash or Accounts Payable

Cost of inventory on hand = Quantity × unit cost
Computing the Cost of Inventory
•
Physical count is made at least once a year,
even with a perpetual system.

•
Consigned goods are excluded.

Perpetual System Examples
•
Assume the following:
Nov. 1 Beg. Inventory 1 @ $40
15 Purchase 6 @ $45
15 Sale 4
26 Purchase 7 @ $50
30 Sale 8

Perpetual System FIFO Example
•
Many companies keep their perpetual
inventory records in quantities only.
•
Other companies keep perpetual records in
both quantities and dollar cost.

Perpetual FIFO
•
Consistent with the physical flow of
inventory
•
Oldest inventory sold first
•
Most recent purchases make-up ending
inventory

Perpetual System FIFO Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 1 1 $40 $40
5 6 $45 $270 1 40 40
6 45 270
15 1 40 40
3 45 135 3 45 135
Columbia Sportswear

Perpetual System FIFO Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 26 7 $50 $ 350 3 $45 $135
7 50 350
30 3 $45 135
5 50 250 2 50 100
Totals 13 $ 620 12 $560 2 $100
Columbia Sportswear

Perpetual System FIFO Example
Nov. 5 Inventory………….…270
Accounts Payable……270
15 Accounts receivable…320
Sales Revenue……….350
15 Cost of Goods Sold…175

Inventory…………….175

Perpetual System FIFO Example
Nov. 26 Inventory………….…350
Accounts Payable……350
30 Accounts receivable…640
Sales Revenue……….640
30 Cost of Goods Sold…385
Inventory…………….385

Perpetual LIFO
•
Is not consistent with the physical flow of
inventory
•
Oldest inventory costs make-up ending
inventory
•
Cost of goods sold is assumed to be from
the most recent purchases

Perpetual System LIFO Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 1 1 $40 $40
5 6 $45 $270 1 40 40
6 45 270
15 4 45 180 1 40 40

2 45 90
Columbia
Sportswear

Perpetual System LIFO Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 26 7 $50 $ 350 1 $40 $135
2 45 90
7 50 350
30 7 $50 350
1 45 45 1 40 40
1 45 45
Totals 13 $ 620 12 $575 2 90
Columbia Sportswear

Perpetual System LIFO Example
Nov. 5 Inventory………….…270
Accounts Payable……270
15 Accounts receivable…320
Sales Revenue……….350
15 Cost of Goods Sold…180
Inventory…………….180

Perpetual System LIFO Example
Nov. 26 Inventory………….…350
Accounts Payable……350

30 Accounts receivable…640
Sales Revenue……….640
30 Cost of Goods Sold…395
Inventory…………….395

Perpetual System Average Cost
•
Ending inventory and cost of goods sold
are based on the average cost per unit.
•
A new average cost per unit is computed
after each purchase.

Perpetual System Average Cost
Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 1 1 40.00 40
5 6 $45 $270 7 44.29 310

15 4 44.29 177 3 44.29 133
Columbia Sportswear

Perpetual System Average Cost
Example
Item: Ski Parka
Received Sold Balance on Hand
Unit Unit Unit

Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Nov. 26 7 $50 $ 350 10 48.30 483

30 8 48.30 386 2 48.30 97

Totals 13 $ 620 12 $563 2 $ 97
Columbia Sportswear

Perpetual System Average Cost
Example
Nov. 5 Inventory………….…270
Accounts Payable……270
15 Accounts receivable…320
Sales Revenue……….350
15 Cost of Goods Sold…177
Inventory…………….177

Perpetual System Average Cost
Example
Nov.26 Inventory………….…350
Accounts Payable……350
30 Accounts receivable…640
Sales Revenue……….640
30 Cost of Goods Sold…386
Inventory…………….386

Objective 3
Compare the effects of FIFO, LIFO,
and average cost

Ending Inventory
FIFO $100.00
LIFO $ 90.00
Weighted-average $ 97.00
Comparison of Methods

Cost of Goods Sold
FIFO $560.00
LIFO $575.00
Weighted-average $563.00
Comparison of Methods