Chapter 8
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Chapter 8. Expenditure and Inventory Process. What are the 4 Activities in the Expenditure Process? Determine the need for goods and services Select suppliers and Order goods/services Receive goods/services Pay suppliers of goods/services. Essential Questions:.

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Chapter 8

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Chapter 8

Chapter 8

Expenditure and Inventory Process


Chapter 8

  • What are the 4 Activities in the Expenditure Process?

    • Determine the need for goods and services

    • Select suppliers and Order goods/services

    • Receive goods/services

    • Pay suppliers of goods/services


Essential questions

Essential Questions:

  • How do companies keep track of their inventories they sell?

  • How do companies record the cost of their inventories?


Enduring understandings

Enduring Understandings:

  • A company must have an information system that captures data needed to report the effects of accounting events and to provide information to management

  • Why? To plan and control the activities of a business.


Enduring understandings1

Enduring Understandings:

  • Whether you use a Perpetual or Period Inventory System to track your inventory…….

  • Whether you use the Gross Method or Net Price Method to record your inventory…….

  • The of inventory is the

VALUE

SAME


Objecti ves

Objectives:

  • Describe the difference through comparing and contrasting between the periodic and perpetual inventory systems.

  • Calculate and record inventory activities using each system.

  • Discuss the difference between the net price and gross price methods for recording inventory.

  • Calculate and record inventories using each method (gross vs. net)


Merchandising vs manufacturing

Merchandising Vs. Manufacturing ?

  • Inventory purchased to be resold – BUY

  • The Account for Inventory is called,

    “Merchandise Inventory” OR

    “Inventory”

    • Ex. Clothes

  • Inventory purchased to be used to MAKE products

  • The Account for Inventory is called,

  • “Direct Materials Inventory”

    • Ex. IPhone – plastic cases

  • “Or Purchases”

    • glue


Decision 1 how do companies keep track of their inventories they sell

Decision # 1 - How do companies keep track of their inventories they sell?

PERPETUAL

  • Determine cost of goods sold and ending inventory on a continuous basis

  • “Running Balance”

  • Typically MORE expensive items

  • Ex. Cars, Jewelry, Computers

PERIODIC

  • Determine ending inventory and cost of goods sold at the end of the period

  • Specific points in time

  • Typically LESS expensive items

  • EX. – Grocery stores, Dollar store items


  • Exercises 8 4 and 8 5

    Exercises 8.4 and 8.5

    • E8.4Case 1: $54,000 + $72,000 = $126,000; $126,000 - $41,000 = $85,000.

    • Case 2: $172,000 + $13,000 = $185,000; $185,000 - $37,000 = $148,000.

    • Case 3: $88,000 + $26,000 = $114,000; $114,000 - $67,000 = $47,000.

    • E8.5Company A: $667,800 + $4,776,200 = $5,444,000; $5,444,000 - $819,900 = $4,624,100.

    • Company B: $2,940,700 - $388,200 = $2,552,500; $2,940,700 - $1,457,900 = $1,482,800.

    • Company C: $534,800 + $163,900 = $698,700; $698,700 - $647,600 = $51,100.


    Decision 1 how do companies keep track of their inventories they sell1

    Decision # 1 - How do companies keep track of their inventories they sell?

    PERPETUAL

    • Purchases –

      • “Inventory Account”

      • Returns and Allowances

        • “Inventory Account”

    • Freight (or insurance)

      • “Inventory Account”

    • Discounts of

      • “Inventory Account”

    PERIODIC

    • Purchases-

      • “Purchases Account”

    • Returns and Allowances

      • “Purchases and Returns Account”

  • Freight (or insurance)

    • “Freight-in” or Insurance”

  • Discounts of

    • “Purchase Discounts”


  • Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC Company buys $9,000 of inventory with terms 2/10, n/30

    PERPETUAL

    Dr. Inventory $9,000

    Cr. Acct. Payable $9,000

    Inventory

    $9,000

    PERIODIC

    Dr. Purchases $9,000

    Cr. Acct. Payable $9,000

    Purchases

    $9,000


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain the inventory

    PERPETUAL

    Dr. Inventory $200

    Cr. Acct. Payable $200

    Inventory

    $9,000

    $200

    PERIODIC

    Dr. Freight-in 200

    Cr. Cash $200

    PurchasesFreight-in

    $9,000 $200


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC returns $800 of inventory because it is the wrong order

    PERPETUAL

    Dr. Acct. Payable $800

    Cr. Inventory $800

    Inventory

    $9,000 $800

    $200

    PERIODIC

    Dr. Acct. Payable $800

    Cr. Purchase returns and allowances $800

    Purchases Freight – in

    $9,000 $200

    Purchase Returns and Allowances

    $800


    Decision 2 how do companies record the cost of their inventories abc pays for the inventory

    Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory

    PERPETUAL

    Dr. Acct. Payable $8,200

    Cr. Cash $8,200

    Accounts Payable

    $800 $9,000

    $8,200

    $8,200

    $0.00

    PERIODIC

    Dr. Acct. Payable $8,200

    Cr. Cash $8,200

    Accounts Payable

    $800 $9,000

    $8,200

    $8,200

    $0.00


    Chapter 8

    With a perpetual system all events that affect the inventory are recorded as increases or decreases to:

    • Purchases Account

    • Inventory Account

    • Separate temporary accounts depending on transaction: Purchases, Returns and Allowances, Freight


    Chapter 8

    With a periodic system all events that affect the inventory are recorded as increases or decreases to:

    • Purchases Account

    • Inventory Account

    • Separate temporary accounts depending on transaction: Purchases, Returns and Allowances, Freight


    Which system must we make an adjustment for at the end of the period

    Which system must we make an adjustment for at the end of the period?

    • Periodic Inventory

    • Perpetual Inventory


    Why must we make an inventory adjustment using the periodic method at the end of the period

    Why must we make an inventory adjustment using the periodic method at the end of the period?

    • To update our inventory records for a current balance.

    • To update our inventory for items stolen or lost.


    Decision 2 how do companies price record their inventories they sell

    Decision # 2 - How do companies price (record) their inventories they sell?

    • Total Cost of inventory =

      Full purchase price of inventory +

      Freight paid to receive inventory +

      Insurance paid on the inventory while in transit.


    Decision 2 how do companies price record their inventories they sell1

    Decision # 2 - How do companies price (record) their inventories they sell?

    GROSS PRICE

    • Full Cost (total cost)

    • Assumption: Discounts, when received are reductions in the purchase price of inventory

    • Purchase discount recorded …..

      WHEN TAKEN

    NET PRICE

    • Discounted Cost (total cost less discount available)

    • Assumption: ALL Discounts should be taken.

    • Cost of inventory is the minimum amount due to the supplier.


    Decision 2 how do companies price record their inventories they sell2

    Decision # 2 - How do companies price (record) their inventories they sell?

    GROSS PRICE

    NET PRICE

    • If company, FAILS to take the discount, the extra amount is a “finance charge” and is recorded as “DISCOUNTS LOST”


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC Company buys $9,000 of inventory with terms 2/10, n/30

    PERIODIC -

    GROSS PRICE

    Dr. Purchases $9,000

    Cr. Acct. Payable $9,000

    Purchases

    $9,000

    PERIODIC-

    NET PRICE

    Dr. Purchases $8,820

    Cr. Acct. Payable $8,820

    (9,000 X 98% = 8,820)

    Purchases

    $8,820


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain the inventory

    PERIODIC

    GROSS PRICE

    Dr. Freight-in $200

    Cr. Cash $200

    Freight-in

    $200

    PERIODIC

    NET PRICE

    Dr. Freight-in 200

    Cr. Cash $200

    Freight-in

    $200


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC returns $800 of inventory because it is the wrong order

    PERIODIC

    GROSS PRICE

    Dr. Acct. Payable $800

    Cr. Purchase returns and allowances $800

    Purchase Returns

    and Allowances

    $800

    PERIODIC

    NET PRICE

    Dr. Acct. Payable $784

    Cr. Purchase returns and allowances $784

    (800 X 98% = 784)

    Purchase Returns

    and Allowances

    $784


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory within the discount period

    PERIODIC

    GROSS PRICE

    Dr. Acct. Payable $8,200

    Cr. Purchase Discount $164

    Cr. Cash $8,036

    Accounts Payable

    $9,000

    $800

    $8,200

    $8,200

    $0.00

    PERIODIC

    NET PRICE

    Dr. Acct. Payable $8,036

    Cr. Cash $8,036

    Accounts Payable

    $8,820

    $784

    $8,036

    $8,036

    $0.00


    What is the balance in inventory under each pricing method with discount taken

    What is the Balance in Inventory under Each Pricing Method? With Discount Taken….

    • Net price

      • Purchases $8,820

      • Returns and Allowances - 784

      • Ending value inventory $8,036

    • Gross price

      • Purchases $9,000

      • Returns and Allowances - 800

      • Discounts - 164

      • Ending value inventory $8,036


    Chapter 8

    Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory AFTER the discount period expired.

    PERIODIC

    GROSS PRICE

    Dr. Acct. Payable $8,200

    Cr. Cash $8,200

    Accounts Payable

    $9,000

    $800

    $8,200

    $8,200

    $0.00

    PERIODIC

    NET PRICE

    Dr. Acct. Payable $8,036

    Dr. Discounts Lost $164

    Cr. Cash $8,200

    Accounts Payable

    $8,820

    $784

    $8,036

    $8,036

    $0.00


    What is the balance in inventory under each pricing method with discount lost or not taken

    What is the Balance in Inventory under Each Pricing Method? With Discount LOST or NOT TAKEN….

    • Net price

      • Purchases $8,820

      • Returns and Allowances - 784

      • Ending value inventory $8,036

    • Gross price

      • Purchases $9,000

      • Returns and Allowances - 800

      • Ending value inventory $8,200

    • Does this mean that the inventory under the gross price method is worth more?

      • No, it simply reflects management’s beliefs concerning discounts.

        • Gross = cost reduction when taken

        • Net = financing cost when lost


    Independent practice homework

    Independent Practice:Homework

    • Read 222-225

    • E 8.6, 8.7, 8.8, 8.9, E8.10


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