1. Accounting for Merchandise Inventory
Chapter 16 2

2. Inventories Every business must choose an inventory evaluation method.
This method must be used
consistently from one
accounting period to the next.

3. Inventories
Inventory management is a key to every successful business.
Insufficient inventory levels discourage customers from patronizing a business.
A store must also consider the cost of carrying inventory.
Dollars tied up in inventory cannot be used for other cash needs. 4

4. Understanding and journalizing transactions using the perpetual
Learning Objective 1
Understanding and journalizing
transactions using the perpetual
inventory system, and explaining
the difference between a perpetual
and periodic inventory system. 4

5. Learning Unit 16-1
A perpetual inventory system provides better internal control over inventories.
This type of system keeps a running balance in the inventory account.
This balance should equal inventory on hand. 5

6. Merchandise Inventory
Learning Unit 16-1
What are two key accounts?
Merchandise Inventory
Cost of Goods Sold 6

7. Learning Unit 16-1 The inventory debit balance is the
up-to-date cost of inventory on hand.
As goods are sold, the cost of the
goods are debited to this account
and credited to the inventory account. 6

8. Learning Unit 16-1 Purchases are debited to the inventory account.
Cash or accounts payable is credited.
A sale necessitates two entries:
Debit Cash or Accounts Receivable
Credit Sales Revenue
Debit Cost of Goods Sold
Credit Inventory

9. Learning Unit 16-1 Debit Inventory Credit Cost of Goods Sold
(For the cost of the goods returned by customer)
Debit Sales Returns & Allowances
Credit Cash
(For the sales price of the goods returned)

10. Learning Unit 16-1 Debit Accounts Payable Credit Inventory
(For the cost of the goods returned by to the supplier)

11. Learning Unit 16-1
The perpetual system gives a day-to-day picture of sales and the cost of goods sold.
The periodic system shows the proper balance in inventory at year end only. 9

12. Maintaining a subsidiary
Learning Objective 2
Maintaining a subsidiary
ledger for inventory. 4

13. Learning Unit 16-2
Accounting for inventory items becomes complicated as soon as product lines expand.
Subsidiary ledgers are necessary to properly track inventory items.
Daily posting (or instant recording through electronic computerized systems) allow managers easy access to information. 10

14. Learning Unit 16-2 Inventory Control Item: VX113 Received Sold Balance
Unit Unit Unit
Date Qty. Cost Total Qty. Cost Total Qty. Cost Total
Jan $50 $700
$50 $
$60 $
,200

15. Understanding periodic methods of determining the value of the
Learning Objective 3
Understanding periodic methods
of determining the value of the
ending inventory. 4

16. Learning Unit 16-3 Different inventory valuing methods are used.
These methods often are not realistic in depicting the physical flow of goods sold.
Inventory amounts affect both the income statement and balance sheet.
Ending inventory errors affect more than one period’s financial statements.

17. Learning Unit 16-3
Consistency is a key factor in inventory accounting.
Once a business selects a particular inventory method, it should be used every year, so that year-to-year comparisons can be made.
Inventory items are counted, but the cost of the inventory has to be decided also. 11

18. Inventory Accounting Methods
Learning Unit 16-3
Inventory Accounting Methods
Specific Invoice
FIFO
LIFO
Weighted Average

19. Learning Unit 16-3 Units Purchased in 200x
January $10 = $ 200
May $20 = $ 500
October $30 = $ 750
Total $1,450
Units sold 55
Units left 15

20. 15 units left in inventory
Learning Unit 16-3
Units sold by date:
Jan (Jan purchases)
May (May purchases)
Oct (5 from Jan., and 15
from Oct. purchases)
Total sales 55
15 units left in inventory

21. Specific Invoice Method
Learning Unit 16-3
Specific Invoice Method
Cost of Goods Sold
Oct 10 $ 500
May
Jan
Total $1,050
Ending Inventory
Oct $300
May
Total $400

22. Learning Unit 16-3 FIFO Method Cost of Goods Sold Jan 5 $ 150
May
Oct
Total $1,150
Ending Inventory
Oct $300
Total $300

23. Learning Unit 16-3 LIFO Method Cost of Goods Sold Oct 10 $ 250
May
Jan
Total $1,300
Ending Inventory
Jan $150
Total $150

24. Weighted Average Method
Learning Unit 16-3
Weighted Average Method
January $10 = $ 200
May $20 =
October $30 =
Total $1,450

25. Learning Unit 16-3 $1,450 total cost/70 total units $20.72 per unit
Cost of goods sold = 55 × $20.72 = $1, Ending inventory = 15 × $20.72 = $1,450.40* *.40 rounding difference

26. Learning Unit 16-3 What items are included in inventory?
Freight terms for purchases must be checked.
These items are included in the merchandise inventory count if they were sent F.O.B. shipping point. 18

27. Learning Unit 16-3
Consignment merchandise is merchandise held for sale for others who hold legal title.
Do not include these items in inventory. 18

28. Estimating ending inventory using the retail method and
Learning Objective 4
Estimating ending inventory
using the retail method and
gross profit method, and how
the ending inventory amount
affects financial reports. 4

29. Estimating Ending Inventory: Retail Method
Learning Unit 16-4
Estimating Ending Inventory: Retail Method
Goods Available Cost Retail
Beg. Inventory $ 4,100 $ 6,900
Net Purchases , ,100
$12,000 $20,000
Ratio: $12,000 ÷ $20,000 = 60%

30. Learning Unit 16-4 Deduct net sales from retail goods
available for sale.
Multiply the cost ratio times the
retail price ending inventory.

31. Learning Unit 16-4
$20,000 – $14,000 = $6,000
$6,000 × 60% = $3,600

32. Learning Unit 16-4 Estimating Ending Inventory: Gross Profit Method
Beginning Inventory $10,000
Net Purchases $ 4,000
Net Sales at retail $ 6,000
Cost percentage %
Estimated Cost of Goods Sold 4,200

33. Learning Unit 16-4 Beginning Inventory $10,000 Net Purchases $4,000 +
Cost of Goods
Available for
Sale $14,000 =
Estimated Cost
of Goods Sold
$4,200
Ending
Inventory
$9,800 – =

34. End of Chapter 16