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: 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 VALUESAME

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 ? 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

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 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 Purchases Freight-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 $0.00 PERIODIC Dr. Acct. Payable $8,200 Cr. Cash $8,200 Accounts Payable $800 $9,000 $8,200 $0.00

With a perpetual system all events that affect the inventory are recorded as increases or decreases to: A. Purchases Account B. Inventory Account C. 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: A. Purchases Account B. Inventory Account C. 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? A. Periodic Inventory B. Perpetual Inventory

Why must we make an inventory adjustment using the periodic method at the end of the period? A. To update our inventory records for a current balance. B. To update our inventory for items stolen or lost.

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 PRICENET 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 $0.00 PERIODIC NET PRICE Dr. Acct. Payable $8,036 Cr. Cash $8,036 Accounts Payable $8,820 $ 784 $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 ◦ Ending value inventory $8,036 Gross price ◦ Purchases $9,000 ◦ Returns and Allowances ◦ Discounts ◦ 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 $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 $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 ◦ Ending value inventory $8,036 Gross price ◦ Purchases $9,000 ◦ Returns and Allowances ◦ 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 A. Read B. E 8.6, 8.7, 8.8, 8.9, E8.10