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Chapter 8. Expenditure and Inventory Process. Bellringer : . What are the 4 Activities in the Expenditure Process?. Essential Questions: . How do companies keep track of their inventories they sell? How do companies record the cost of their inventories?. Enduring Understandings: .

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Chapter 8

Expenditure and Inventory Process


Bellringer:

  • What are the 4 Activities in the Expenditure Process?


Essential Questions:

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

  • How do companies record the cost of their inventories?


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 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


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)


Bellringer:

  • Which of the following expenditure process activities are considered an accounting event?

    • Determine the need for goods and services

    • Select suppliers and Order goods/services

    • Receive goods/services

    • Pay suppliers of goods/services


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?

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


  • 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”


  • 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


    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


    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

    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


    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


    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?

    • Periodic Inventory

    • Perpetual Inventory


    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.


    Independent Practice:Homework

    • Read 222-225

    • E8.6, 8.7


    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 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 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”


    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


    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


    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


    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….

    • 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


    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….

    • 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


    M-3 Sample Problem…..


    Independent Practice:Homework

    • Read 222-225

    • E8.6, 8.9, E8.10


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