Inventories and Cost of Goods Calculations Chapter 9 Inventories and Cost of Goods Calculations

Periodic Inventory System Perpetual Inventory System 9-1 Comparison of Journal Entries under Perpetual and Periodic Inventory Systems 23,000 22,770 230 Cash Sales Discounts Accounts Receivable Cash received on account with a discount. July 25 No entry 500 Merchandise Inventory Cost of Goods Sold 1,000 Sales Returns and Allowances Return on merchandise. July 18 12,000 24,000 Sales Revenue Sale of merchandise on credit. July 16 37,240 760 38,000 Accounts Payable Purchase Discounts Payment on account with a discount. July 14 200 Freight-in Freight costs on purchases. July 8 2,000 Purchase Returns and Allowances Purchase returns and allowances. July 6 40,000 Purchases Purchase of merchandise on credit. July 5 Periodic Inventory System Perpetual Inventory System Transaction

9-2 Cost of Goods Sold CALCULATION OF COST OF GOODS PURCHASED Purchases $36,000 Less: Purchase returns and allowances Purchase discounts $7,000 3,000 10,000 Net purchases 350,000 Add: Freight-in 5,000 Cost of goods purchased $355,000 CALCULATION OF COST OF GOODS SOLD Inventory, January 1 $40,000 355,000 Cost of goods available for sale 395,000 Inventory, December 31 50,000 Cost of goods sold $345,000

9-3 Components of the Income Statement using the Periodic Inventory System Sales - Sales returns and allowances Sales discounts = Net Sales Net Sales - Cost of goods sold = Gross profit Gross Profit Net Sales Purchases - Purchase returns and allowances Purchase discounts = Net purchases + Freight-in Cost of goods purchased Selling expenses (including freight-out) + Administrative expenses = Total operating expenses Operating Expenses Gross profit - Total operating expenses = Net income Net Income Beginning Inventory + Cost of goods purchase = Cost of goods available for sale - Ending inventory Cost of goods sold Cost of Goods Sold

9-4 Costing Ending Inventory using FIFO, LIFO and Average Cost Methods – Periodic System Your company provided the following data for the year: Units Unit Cost Total Cost January 1 … 80 $15.00 $1,200 March 15 purchase … 60 16.00 960 June 20 purchase … 100 17.50 1750 October 25 purchase … 90 18.00 1,620 Units and goods available … 330 $5,530 Ending inventory (December 31) consists of 110 units. Complete the costing of ending inventory under FIFO, LIFO, and average cost.

9-4 Costing Ending Inventory using FIFO, LIFO and Average Cost Methods – Periodic System (continued) Cost of goods available for sale …. $5,530 LESS: Ending Inventory (FIFO) Dates: Units X Cost October 25 (90 X $18,000) = $1,620 June 20 (20 X $17.50) = 350 1,970 Ending Inventory (LIFO) Jan 1 (80 X $15.00) = $1,200 Mar 15 (30 X $16.00) = 480 1,680 Ending Inventory (Aver. Cost) Wt. Aver. Cost + Units = Unit Cost $5,530 + 330 = $16.76 (r) $16.76/unit X 110 units 1,844 (r) Cost of Goods Sold …. $3,560 $3,850 $3,686 Balance Sheet Effects

9-5 Effects of Inventory Errors Cost of Goods Sold Net Income Beginning inventory understated Understated Overstated Beginning inventory overstated Ending inventory understated Ending inventory overstated SELF-CORRECTING ERRORS OVER TWO PERIODS Current Period Next Period Ending Inventory Error Beginning Inventory Error An error’s effect on income this period Reverse effect on net income in this period CORRECT TOTAL INCOME OVER TWO PERIODS becomes offsets