Module 6

1. Module 6 Inventory and Accounting for Merchandisers

2. Learning Objectives

3. Merchandising Activities

4. Computing Net Income Merchandiser Service Company Net Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Operating Expenses Net Income Net Income

5. Inventory

6. Inventory

7. Inventory Systems

8. Perpetual System-Example Purchases May. 1 Inventory 66,000 Accounts Payable6,000 Purchased inventory on account Purchase Returns and Allowances May. 4 Accounts Payable2,000 Inventory 2,000 Defective merchandise returned to supplier.

9. Purchase/Sales Discounts Terms Time Due Credit Period = 30 days Discount Period = 10 days May.11 May.31 May.1 (Full amount minus 2% discount) due between May.1 and May.11 Full amount due anytime between Mayt.12 and May.31 Purchase or Sale

10. Perpetual System — Example • Purchase Discounts- Assume the purchase of inventory on May 1 was on the terms 2/10,n30. • Case 1-Discount taken May.11 Accounts Payable 644,000 Inventory 80 Cash 3,920 2% x (6,000 - 2,000) = 80 Case 2-Discount not taken Oct.31 Accounts Payable4,000 Cash 4,000

11. Transportation Charges — Perpetual System Seller Buyer Goods FOB Shipping Point (Buyer pays shipping charges) Carrier FOB Destination (Seller pays for shipping charges)

12. Perpetual System — Example • Transportation Charges • May. 2 Inventory 100 • Accounts Payable100 • Transportation charges on goods purchased FOB shipping point.

13. Perpetual System — Example • Sales of Merchandise May.15 Accounts Receivable4,000 Sales 4,000 Sale of merchandise, terms 1/10, n30 Cost of goods sold 3,000 Inventory 3,000 To record cost of merchandise sold

14. Perpetual System — Example • Sales Returns and Allowances Msy.17 Sales Returns & Allowance 400 Accounts Receivable 400 Defective merchandise returned Inventory 300 Cost of Goods Sold 300 To record return of inventory

15. Perpetual System — Example • Sales Discounts • Case 1- Discount taken • May.25 Cash 3,564 • Sales Discounts36 • Accounts Receivable 3,600 • 1% X (4,000 - 400) = 36 Case 2- Discount not taken • May.25 Cash 3,600 • Accounts Receivable 3,600 • (4,000- 400)

16. Adjustments — Perpetual Inventory

17. Perpetual System — Example • Inventory per accounting records: $187,000 • Inventory per physical count: $184,200 • Difference (shrinkage) $2,800 • Adjustment required: • May.31 Cost of Goods Sold 2,800 • Inventory 2,800 • To record inventory shrinkage revealed by physical count.

18. Income Statement Formats

19. Classified Multi-step Format

20. Multi-step Format

21. Single- step Format

22. Closing Entries — Perpetual System

23. Periodic and Perpetual Inventory Systems Compared

24. Example Periodic System Perpetual System Purchase of Merchandise Return of Merchandise Introductory Accounting SAP 2007 / SAP University Alliances

25. Example Periodic System Perpetual System Purchase Discount Taken (2/10, n30) Transportation Charges Introductory Accounting SAP 2007 / SAP University Alliances

26. Example Periodic System Perpetual System Sale of merchandise Introductory Accounting SAP 2007 / SAP University Alliances

27. Example Periodic System Perpetual System Sales Return Introductory Accounting SAP 2007 / SAP University Alliances

28. Assigning Costs to Inventory Introductory Accounting SAP 2007 / SAP University Alliances

29. Items in Merchandise Inventory Introductory Accounting SAP 2007 / SAP University Alliances

30. Costs of Merchandise Inventory

31. Assigning Costs to Inventory

32. Merchandising Cost Flows Beginning Inventory Net Cost of Purchases Merchandise Available for Sale Balance Sheet Income Statement Ending Inventory Cost of Goods Sold Introductory Accounting SAP 2007 / SAP University Alliances

33. Specific Identification Examples: Automobiles, custom furniture, art.

34. Specific Identification — Example The opening inventory consists of 10 units @ $91/unit.

35. Specific Identification — Example This results in two layers of inventory. Additional units are purchased @ $106/unit.

36. Specific Identification — Example On August 14, 20 units are sold. Eight of these units came from the opening inventory and the remaining 12 units came from the August 3 purchase.

37. Specific Identification — Example This leaves 2 units remaining from the original inventory and 3 units remaining from the August 3 purchase.

38. First-In, First-Out (FIFO)

39. FIFO — Example The opening inventory consists of 10 units @ $91/unit.

40. FIFO — Example This results in two layers of inventory. Additional units are purchased @ $106/unit. Additional units re purchased @ $106/unit.

41. FIFO — Example Under FIFO, units are assumed to be sold in the order acquired. Therefore, of the 20 units sold on August 14, the first 10 units come from beginning inventory. Therefore, those 10 units are removed from the inventory record based on the cost of those units of $91.

42. FIFO — Example The remaining 10 units sold on August 14th come from the next purchase, made on August 3rd. Therefore, these units are removed from the inventory record based on their cost of $106.

43. FIFO — Example The ending inventory consists of the 5 remaining units from the August 3 purchase.

44. Last-In, First-Out (LIFO)

45. LIFO — Example The opening inventory consists of 10 units @ $91/unit.

46. LIFO — Example This results in two layers of inventory. Additional units are purchased @ $106/unit.

47. LIFO — Example Of the 20 units sold, these units are assumed to be sold first.

48. LIFO — Example Once the latest units purchased are sold, units are sold from the previous purchase.

49. LIFO — Example This leaves 5 units remaining from the first purchase.

50. Cost of goods available for sale Number of units available for sale Moving Weighted Average Method Average cost per unit =