1. Learning Objectives Understand the Business – LO1 Describe the issues in managing different types of inventory. Study the accounting methods – LO2 Explain how to report inventory and cost of goods sold. – LO3 Compute costs using three inventory costing methods. – LO4 Report inventory at the lower of cost and net realizable value. – LO5 Analyze and record inventory purchases, transportation, returns and allowances, and discounts. Evaluate the results – LO6 Evaluate inventory management by computing and interpreting the inventory turnover ratio. Review the chapter 1© McGraw-Hill Ryerson. All rights reserved.

2. Recording Inventory Transactions © McGraw-Hill Ryerson. All rights reserved.2 Inventory Purchases American Eagle Outfitters purchases $10,500 of vintage jeans on credit with terms 2/10 n/30. 1 Analyze 2 Record LO5

3. © McGraw-Hill Ryerson. All rights reserved.3 Transportation Cost American Eagle Outfitters pays $400 cash to a trucker who delivers the vintage jeans to one of its stores: 1 Analyze 2 Record All costs needed to get inventory into a condition and location ready for sale should be included in Inventory. All costs incurred after the sale, such as delivery of goods to customers, should be treated as selling expenses. LO5

4. © McGraw-Hill Ryerson. All rights reserved.4 Purchase Returns and Allowances American Eagle Outfitters returned some of the vintage jeans to the supplier and received a $500 reduction in the balance owed: LO5 1 Analyze 2 Record Purchase Returns and Allowances are a reduction in the cost of inventory purchases associated with unsatisfactory goods.

5. © McGraw-Hill Ryerson. All rights reserved.5 Purchase Discounts American Eagle Outfitters pays the supplier for the $10,500 purchase of vintage jeans. Remember, the terms were 2/10 n/30 and inventory costing $500 has been returned, so the amount paid within the discount period will be ($10,500 - $500) – 2% = $9,800. Purchase Discounts are cash discounts received for prompt payment of a purchase on account. A purchase discount reduces the cost of inventory. 1 Analyze 2 Record LO5