Principles of Accounting I

Principles of Accounting I
Asst.Prof.Dr. Panchat Akarak School of Accounting Chiang Rai Rajabhat University Principles of Accounting I

Merchandising Company Perpetual Inventory System
Outline Inventories in General Inventories and Cost of Goods Sold Determining inventory Cost Methods of Determining inventory Cost Specific Identification First-in, First-out (FIFO) Last in, First-out (LIFO) Weighted-Average Method Perpetual Inventory Procedure Perpetual Inventory Cards Principles of Accounting I

Merchandising Company
Perpetual Inventory Procedure Inventories in General Merchandise inventory is the quantity of goods on hand and available for sale at any specific time. Principles of Accounting I

Inventories and Cost of Goods Sold 1. Inventory is often the largest and most important asset owned by a merchandising manufacturing firm. Principles of Accounting I

Inventories and Cost of Goods Sold Taking a Physical Inventory 2.1 Taking a physical inventory is distinct from pricing an inventory and is not, strictly speaking, an accounting function. Principles of Accounting I

Inventories and Cost of Goods Sold 2.2 Taking an inventory is the procedure of obtaining the physical quantities of the goods on hand by counting, weighing, measuring, and estimating. Principles of Accounting I

Inventories and Cost of Goods Sold 3. Importance of Proper Inventory Valuation An accurate valuation of ending inventory is necessary to reflect the proper net income for the period, since it is deducted from cost of goods available for sale to yield cost of goods sold. Principles of Accounting I

Inventories and Cost of Goods Sold 3.1 If ending inventory is overstated, current and total assets will be overstated and cost of goods sold will be understated with a resulting overstatement of gross margin and net income and owner’s equity. Principles of Accounting I

Inventories and Cost of Goods Sold 3.2 If ending inventory is misstated, that misstatement is carried forward into the next year. Principles of Accounting I

Determining inventory Cost Costs Included in Inventory Cost Inventory Cost includes all necessary outlays to obtain the goods and place them in condition and in the desired location for sale to customers, Inventory cost includes the following Costs: Principles of Accounting I

Seller’s invoice price, less purchase discounts, Cost of insurance on the goods while in transit. Transportation charges when borne by the buyer. Handling Costs. Inventory Valuation under Changing Prices Merchandise inventory is valued at cost. Principles of Accounting I

Methods of Determining inventory Cost There are four methods that can be used to determine the cost of inventory: Specific identification, FIFO, LIFO, and Weighted-average method Principles of Accounting I

Jam had 300 units of toy A3 in its end-of year inventory. Its beginning inventory and year’s purchases of toy A3 were as follows: Date Transection amount @ Total cost Jan. 1 inventory 100 units @0.90 90 Apr. 14 purchases 300 units @0.70 210 July 2 500 units @1.30 650 Oct. 28 400 units @1.50 600 Dec. 15 200 units @1.60 320 1,500 units 1,870 Principles of Accounting I

Specific Identification Specific identification calls for the assignment to the units on hand of their specific costs. Identification is usually made through means of a serial number or identification tag. Principles of Accounting I

Specific Identification 2. Advantages and Disadvantages of Specific Identification 2.1 Cost of goods sold and ending inventory are stated at the actual cost of specific units sold and on hand. 2.2 Earnings may be manipulated if different units of a given product have different costs. Principles of Accounting I

Specific Identification 2.3 Relatively homogeneous units are included in inventory at different prices. 2.4 In most cases, the method is too costly to apply. Principles of Accounting I

Specific Identification
Jam had 300 units of toy A3 in its end-of year inventory. Ending Inventory Units of ending Cost of Goods Sold The cost of the ending inventory was determined using the Specific Identification 470.- Total 1,400 Principles of Accounting I

First-in, First-out (FIFO) 1. First-in, First-out (FIFO) method assumes that the first units acquired are the first sold; ending inventory is valued at the most recent purchase prices. Principles of Accounting I

First-in, First-out (FIFO) 1.1 At the end of the year, the physical count is taken and then valued by starting with the most recent purchase and going back through the year until all of the ending inventory has been assigned a cost. Principles of Accounting I

First-in, First-out (FIFO) 1.2 Earnings exit if sales revenues are sufficient to cover the historical cost of the units sold and other expenses. Principles of Accounting I

First-in, First-out (FIFO)
Jam had 300 units of toy A3 in its end-of year inventory. Ending Inventory Units of ending Cost of Goods Sold The cost of the ending inventory was determined using the FIFO method 470.- 1, =1,400 Principles of Accounting I

First-in, First-out (FIFO) 2. Advantages and Disadvantages of FIFO 2.1 It is easy to apply. 2.2 The flow of costs corresponds with the physical flow of goods. 2.3 No manipulation of income is possible. 2.4 The balance sheet correctly reflects the approximate current market value of the inventory. Principles of Accounting I

Last in, First-out (LIFO) 1. Last-in, first-out (LIFO) method assumes that the last units acquired are the first ones sold; cost of goods sold is the cost of the latest goods acquired. Principles of Accounting I

Last in, First-out (LIFO) 1.1 To compute the cost of ending inventory, begin with the beginning inventory cost and continue listing purchases until enough units have been listed to equal the number in ending inventory. 1.2 Cost of goods sold = Cost of goods available – Cost of ending inventory Principles of Accounting I

Last in, First-out (LIFO)
Jam had 300 units of toy A3 in its end-of year inventory. Ending Inventory Units of ending Cost of Goods Sold The cost of the ending inventory was determined using the LIFO method 230.- 1, =1,640 Principles of Accounting I

Last in, First-out (LIFO) 2. The Advantages and Disadvantages of LIFO 2.1 Income exists only if sales revenues are sufficient to cover all expenses and the cost of replacing the units sold, provided replacement occurs before the end of the period. 2.2 In a period of rising prices, inventory is often rather badly understated. 2.3 Income can be manipulated by speeding up of delaying replacement purchases. Principles of Accounting I

Weighted-Average Method 1. Weighted-average method also uses actual costs; units sold and in inventory are all cost at the average figure. 1.1 Weighted-average unit cost= (total cost of purchases + Cost of beginning inventory) / (units purchased + Units in beginning inventory). Principles of Accounting I

Weighted-Average Method
Jam had 300 units of toy A3 in its end-of year inventory. Ending Inventory Units of ending Cost of Goods Sold The cost of the ending inventory was determined using the weighted-average cost method 375.- 1,870/1,500 1, =1,495 Principles of Accounting I

Weighted-Average Method 2. Advantages and Disadvantages of Weighted –Average 2.1 Inventory is not as badly understated as under LIFO, but not as up to date as FIFO. 2.2 Although income can be manipulated, the effects of buying or not buying are lessened due to the averaging process. Principles of Accounting I

Perpetual Inventory Procedure
Perpetual inventory procedure is often used with items having a high unit cost to enhance internal control. a. Using perpetual inventory procedure, there are no purchases or purchases related accounts. b. The Merchandise Inventory account is used to record purchases for resale. c. At the time of sale, Merchandise Inventory is credited leaving a balance showing the cost of inventory on hand. Principles of Accounting I

Perpetual Inventory Cards
Perpetual inventory cards can show the maximum and minimum number of units the company wishes to stock at any time in addition to reflecting quantity and cost of items purchased and sold. At year end when a physical inventory is taken and compared with perpetual records, any shortages are debited to loss from Inventory Shortage and Merchandise Inventory is credited. There are no purchases or purchase related accounts to be closed and only cost of goods sold requires a closing entry. Principles of Accounting I

Purchases of Merchandising
Perpetual Inventory Purchases of Merchandise: Dr. Inventory xx Cr. Cash xx Paid for Purchases of Merchandise and Cr. Accounts Payable xx Purchases of Merchandise on account Principles of Accounting I

Purchases Returns Purchases Returns and Allowance Dr. Cash xx Cr. Inventory xx Or Dr. Accounts Payable xx Principles of Accounting I

Purchases Discounts Purchases Discounts 2/10, n/30 3/10, E.M.O. Dr. Accounts Payable xx Cr. Cash xx Inventory (Cash discounts) xx Principles of Accounting I

Transportations Paid for Transportation inventory Transportation-In is Costs Dr. Inventory XX Cr. Cash XX Transportation-Out is Operating expenses Dr. Transportation-out XX Principles of Accounting I

Sales Revenues Sales Revenues Recording Gross Sales Recording Cost of Goods Sold Sales Returns and Allowances Recording Cost of Goods Returns Returns Sales Discount Principles of Accounting I

Cost of Goods sold Cost of Goods Sold Perpetual Inventory System Recording Purchases to Inventory Purchases Returns to deducted Inventory Purchase Discounts to deducted Inventory Transportation-In to Cost of Inventory Inventories Ending Principles of Accounting I

Sales Revenues Recording Gross Sales at sale price Dr. Cash/Accounts Receivable xx Cr. Sales Revenues xx Recoding COGS- at cost Dr. Cost of Goods Sold xx Cr. Inventory xx Principles of Accounting I

Sales Returns and Allowances
Merchandise returned by the buyer is recorded in a Sales Returns and Allowances account which is a contra revenue account to Sales. Dr. Sales Return and Allowances xx Cr. Cash/Accounts Receivable xx and Dr. Inventory xx Cr. Cost of Goods Sold xx Principles of Accounting I

Sales Discounts Sales Discounts which is a contra revenue account to Sales. Dr. Cash xx Sale Discounts xx Cr. Accounts Receivable xx Principles of Accounting I

Transportations Paid for inventory transportation to customer Transportation-Out is Operating expenses Dr. Transportation-out XX Cr. Cash XX Principles of Accounting I

Trial Balance -Perpetual inventory
A/C No. Dr. Cr. --- Inventory Ending 14 7,000 Sales 41 50,000 Sales Returns and Allowances 42 400 Sales Discounts 43 300 Cost of Goods Sold 51 25,000 Transportation-out 52 800 Selling Expenses 54 10,000 Administrative Expense 55 15,000 Principles of Accounting I

Review Vocabulary Accounts Name Balance Sales Revenues Cr. Gross Sales Net Sales Sale Discount Dr. Sale Returns and Allowances Inventories Ending Cost of Goods Sold Transportation Costs Transportation out Principles of Accounting I

Review Vocabulary Accounts Name Balance Operating Expense Dr. Gross margin Cr. Gross Profit Other revenues Other expense Selling expense Administrative expense Principles of Accounting I

The End Thank you for your Attention Q & A Principles of Accounting I

Principles of Accounting I

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