Perpetual Inventory System Managerial Accounting Prepared by Diane Tanner University of North Florida Chapter 28

Inventory Systems  Two systems available  Periodic system  Perpetual system  Major differences in systems  When/how inventory is updated  How each sale is recorded 2

 Inventory records are updated after each purchase and sale  Accounts used by merchandising companies  Inventory  Cost of goods sold UPC and bar codes make this method widely used Perpetual Inventory System 3

Perpetual Inventory Accounting for Merchandisers  Purchase of merchandise  Increase Merchandise Inventory  Sale of merchandise  Expense phase  Decrease Inventory  Increase Cost of Goods Sold  Revenue phase  Increase Cash or Accounts Receivable  Increase Sales Revenue 4

Cost of Inventory Purchased Invoice price Less: Cash discounts Returns & allowances Plus: Freight-in Sales taxes (if any) General rule: Inventory includes all costs necessary to get the inventory ready to sell. 5

6 Freight Costs Incurred by Merchandisers  Freight-In  The shipping cost incurred to acquire inventory  Also known as Transportation-in  Pertains to inventory purchased  Freight-out  Shipping cost incurred to ship inventory to customers  Also known as Transportation-out, delivery expense, shipping expense  Pertains to inventory sold 6

7 Freight-In/Freight-Out Reporting  Freight-In  Added to Inventory account in the balance sheet  Moved to Cost of Goods Sold on the income statement when the related inventory item is sold  Freight-out  Reported as Delivery Expense on the income statement when incurred 7

Merchandise Transactions April 2: Ceradyne purchased 1000 mugs at $3 each on account. Merchandise inventory 3,000 Accounts payable 3,000 April 8: Ceradyne sold 200 mugs for $5 each on account. Accounts Receivable (200*$5)1,000 Sales1,000 Cost of goods sold (200*$3) 600 Merchandise inventory 600 8

9 Merchandise Inventory Reporting Merchandise Inventory Cost of Goods Sold Beginning Inventory 300 Purchase 3,000 Sale 600 Ending 2, Balance Sheet Income Statement 9

10 The End