1. Reporting and Analysing Inventory

2. Classifying Inventory In a manufacturing business, inventories are usually classified into 3 categories: Raw materials: materials will be used but have not yet been placed in the production process Work in process: manufactured inventory started but not yet completed in the production process Finished goods: completed manufactured items ready for sale

3. Recording Purchases of Inventory 1. Purchase of inventory Purchases account used to record cost of all inventory purchased. Example: Sauk Stereo purchases inventory for $3800 from PW Audio Supply Ltd. May 5 Purchases 3 800 Accounts Payable 3 800 (To record goods purchased on account, terms 2/7, n/30)

4. Recording Purchases of Inventory (cont’d) 2. Purchase returns and allowances Example: Sauk Stereo returns goods valued at $300 to PW Audio Supply as they are incorrect. May 8 Accounts Payable 300 Purchase Returns and Allowances 300 (To record return of incorrect goods purchased from PW Audio Supply)

5. Recording Purchases of Inventory (cont’d) 3. Freight costs Freight costs incurred by purchaser. Example: Sauk Stereo pays We Deliver Freight Co. $150 for freight charges on purchases. May 6 Freight-in (Transportation-in) 150 Cash 150 (To record payment of freight on goods purchased)

6. Recording Purchases of Inventory (cont’d) 4. Purchase discounts Example: Sauk Stereo pays PW Audio Supply Ltd balance outstanding and receives a 2% discount. May 12 Accounts Payable ($3800 - $300) 3 500 Cash3 430 Discount Received ($3500 x 0.02) 70 (To record payment to PW Audio Supply within the discount period)

7. Recording Sales of Inventory 1. Sale of inventory Example: Sale of inventory to Sauk Stereo by PW Audio Supply Ltd. May 5 Accounts Receivable 3 800 Sales 3 800 (To record credit sales per invoice no. 731 to Sauk Stereo)

8. Recording Sales of Inventory (cont’d) 2. Sales returns and allowances Example: Goods returned to PW Audio Supply Ltd by Sauk Stereo. May 8 Sales Returns & Allowances 300 Accounts Receivable 300 (To record return of goods from Sauk Stereo)

9. Recording Sales of Inventory (cont’d) 3. Sales discounts Example: PW Audio Supply Ltd receives cash of $3430 from Sauk Stereo after allowing 2% discount. May 12 Cash3 430 Discount Allowed ($3500 x 0.02) 70 Accounts Receivable ($3800 – $300) 3 500 (To record collection from Sauk Stereo within discount period)

10. Determining Cost of Goods Purchased Accounts used to record purchases Periodic Debit or Effect on cost of Item account title credit entry goods purchased Invoice pricePurchases Debit Increase Freight chargesFreight-in Debit Increase paid by purchaser Purchase returnsPurchase Credit Decrease and allowancesReturns granted by seller& Allowances

11. PW AUDIO SUPPLY LTD Income Statement for the year ended 30 June 2008 Sales revenue Gross sales revenue $480 000 Less: Sales returns & allowances 20 000 Net sales 460 000 Cost of goods sold Inventory, 1 July 2007 $ 36 000 Purchases $325 000 Less: Purchase ret. & allow. 17 200 Net purchases 307 800 Add: Freight-in 12 200 Cost of goods purchased 320 000 Cost of goods available for sale 356 000 Inventory, 30 June 2008 40 000 Cost of goods sold 316 000 Gross profit 144 000 Other operating revenue 24 000 168 000 Operating expenses 125 000 Profit before income tax 43 000 Less: Income tax expense 12 900 Profit after tax $ 30 100