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Module 6. Inventory and Accounting for Merchandisers. Learning Objectives. Merchandising Activities. Computing Net Income. Merchandiser. Service Company. Net Sales. Revenue. Cost of Goods Sold. Gross Profit. Operating Expenses. Operating Expenses. Net Income. Net Income.

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module 6

Module 6

Inventory and Accounting for Merchandisers

computing net income
Computing Net Income

Merchandiser

Service Company

Net Sales

Revenue

Cost of Goods

Sold

Gross Profit

Operating

Expenses

Operating

Expenses

Net Income

Net Income

slide8

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.

slide9

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

slide10

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

transportation charges perpetual system
Transportation Charges — Perpetual System

Seller

Buyer

Goods

FOB Shipping Point

(Buyer pays shipping charges)

Carrier

FOB Destination

(Seller pays for shipping charges)

slide12

Perpetual System — Example

  • Transportation Charges
  • May. 2 Inventory 100
  • Accounts Payable100
      • Transportation charges on goods purchased FOB shipping point.
slide13

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

slide14

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

slide15

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)
slide17

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.
example
Example

Periodic System

Perpetual System

Purchase of Merchandise

Return of Merchandise

Introductory Accounting

SAP 2007 / SAP University Alliances

example1
Example

Periodic System

Perpetual System

Purchase Discount Taken (2/10, n30)

Transportation Charges

Introductory Accounting

SAP 2007 / SAP University Alliances

example2
Example

Periodic System

Perpetual System

Sale of merchandise

Introductory Accounting

SAP 2007 / SAP University Alliances

example3
Example

Periodic System

Perpetual System

Sales Return

Introductory Accounting

SAP 2007 / SAP University Alliances

slide28

Assigning Costs to Inventory

Introductory Accounting

SAP 2007 / SAP University Alliances

slide29

Items in Merchandise Inventory

Introductory Accounting

SAP 2007 / SAP University Alliances

merchandising cost flows
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

slide33

Specific Identification

Examples: Automobiles, custom furniture, art.

specific identification example
Specific Identification — Example

The opening inventory consists of 10 units @ $91/unit.

specific identification example1
Specific Identification — Example

This results in two layers of inventory.

Additional units are purchased @ $106/unit.

specific identification example2
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.

specific identification example3
Specific Identification — Example

This leaves 2 units remaining from the original inventory and 3 units remaining from the August 3 purchase.

fifo example
FIFO — Example

The opening inventory consists of 10 units @ $91/unit.

fifo example1
FIFO — Example

This results in two layers of inventory.

Additional units are purchased @ $106/unit.

Additional units re purchased @ $106/unit.

fifo example2
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.

fifo example3
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.

fifo example4
FIFO — Example

The ending inventory consists of the 5 remaining units from the August 3 purchase.

lifo example
LIFO — Example

The opening inventory consists of 10 units @ $91/unit.

lifo example1
LIFO — Example

This results in two layers of inventory.

Additional units are purchased @ $106/unit.

lifo example2
LIFO — Example

Of the 20 units sold, these units are assumed to be sold first.

lifo example3
LIFO — Example

Once the latest units purchased are sold, units are sold from the previous purchase.

lifo example4
LIFO — Example

This leaves 5 units remaining from the first purchase.

slide50

Cost of goods available for sale

Number of units available for sale

Moving Weighted Average Method

Average cost per unit

=

moving weighted average example
Moving Weighted Average — Example

The opening inventory consists of 10 units @ $91/unit.

moving weighted average example1
Moving Weighted Average — Example

Additional units are purchased @ $106/unit.

This results in an average cost of $100/unit.

(10 x $91) + (15 x $106)

25 units

moving weighted average example2
Moving Weighted Average — Example

These 20 units are sold at the average cost of $100/unit.

moving weighted average example3
Moving Weighted Average — Example

This leaves 5 units remaining at an average cost of $100/unit.

financial reporting1

Weighted Average

First-In, First-Out

Last-In, First-Out

Smoothes out purchase price changes.

Ending inventory approximates current replacement cost.

Better matches current costs in cost of goods sold with revenues.

Financial Reporting

Advantages of Each Method

reporting
Reporting

Introductory Accounting

SAP 2007 / SAP University Alliances