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Accounting Lec#8.pptx

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Accounting Lec#8.pptx

  1. 1. Accounting
  2. 2. Dual Nature of Merchandise Transactions Each merchandising transaction affects a buyer and a seller. A selling transaction for a seller is purchase transaction for buyer. Accounts payable for buyer is accounts receivable for seller.
  3. 3. Inventories Control of Inventory Two primary objectives of control over inventory: ◦ Safeguarding inventory from damage or theft. ◦ Reporting inventory in the financial statements. Safeguarding inventory ◦ Purchase Order ◦ Receiving Report ◦ Vendor Invoice Reporting Inventory ◦ Physical Inventory or Count of Inventory should be taken near year-end to make sure that the quantity of inventory reported in the financial statements is accurate.
  4. 4. Periodic vs Perpetual Inventory System The periodic system relies upon an occasional physical count of the inventory to determine the ending inventory balance and the cost of goods sold, while the perpetual system keeps continual track of inventory balances. The more sophisticated of the two is the perpetual system, but it requires much more record keeping to maintain.
  5. 5. Adjusting Inventory Shrinkage There are some inventory losses due to shoplifting, employee theft or errors. This is called Inventory Shrinkage or Inventory Shortage. Account Balance of Merchandise Inventory $63,950 Physical Merchandise Inventory on hand 62,150 Inventory Shrinkage $ 1,800 Adjusting Entry Dec 31 Cost of Merchandise Sold 1,800 Merchandise Inventory 1,800 Inventory Shrinkage ($63,950 - $61,150)
  6. 6. Cost Flow Assumption Cost flow is in the order in which the costs were incurred. First In, First Out (FIFO) Cost flow is in the reverse order in which the costs were incurred. Last In, First Out (LIFO) Cost flow is an average of the costs. AVERAGE COST
  7. 7. Illustration May 10 Purchased 01 Unit for $9.00 May 18 Purchased 01 Unit for $13.00 May 24 Purchased 01 Unit for $14.00 Average Cost = (9+13+14)/3=36/3=$12.00 May 31 Sold 01 Unit for $20.00 Income statements using different cost methods FIFO LIFO Average Cost Sales $20 $20 $20 Cost of Merchandise Sold 9 14 12 Gross Profit $11 $6 $8
  8. 8. Inventory Costing Under Periodic Inventory Net Sales 3,900 $ 3,900 $ 3,900 $ Cost of Merchandise Sold Beginning Inventory 2,000 $ 2,000 $ 2,000 Purchases 3,880 3,880 3,880 Merchandise Available for Sale 5,880 $ 5,880 $ 5,880 Less: Ending Inventory 3,250 3,150 3,050 Cost of Merchandise Sold 2,630 2,730 2,830 Gross Profit 1,270 $ 1,170 $ 1,070 $ PARTIAL INCOME STATEMENTS FIFO Average Cost LIFO
  9. 9. Effects of Changing Costs : FIFO, LIFO Increasing Costs (Prices) Decreasing Costs (Prices) Highest Amount Lowest Amount Highest Amount Lowest Amount Cost of merchandise sold LIFO FIFO FIFO LIFO Gross profit FIFO LIFO LIFO FIFO Net income FIFO LIFO LIFO FIFO Ending merchandise inventory FIFO LIFO LIFO FIFO
  10. 10. Reporting Merchandise Inventory in the Financial Statements Cost is the primary basis for valuing and reporting inventories in the financial statements. But, inventory may be valued other than cost in the following cases: The cost of replacing items in inventory is below the recorded cost. The inventory may not be sold at normal prices due to imperfections, style change, or other causes.
  11. 11. Reporting Merchandise Inventory in the Financial Statements ◦ If the cost of replacing inventory is lower than its purchase cost, the lower-of-cost-or-market (LCM) method is used to value the inventory. ◦ Merchandise that is out of date, spoiled, or damaged can often be sold only at a price below its original cost. Such merchandise should be valued at its net realizable value. Net Realizable Value = Estimated Selling Price – Direct Costs of Disposal Net Realizable Value = $800 – $150 = $650 Original cost $1,000 Estimated selling price 800 Selling expenses (special ads, additional commission 150
  12. 12. Effects of Inventory Errors on Income Statement Income Statement Effects Inventory Error Cost of Merchandise Sold Gross Profit Net Income Beginning Inventory is: Understated Understated Overstated Overstated Overstated Overstated Understated Understated Ending Inventory is: Understated Overstated Understated Understated Overstated Understated Overstated Overstated
  13. 13. Effects of Inventory Errors on Balance Sheet Balance Sheet Effects Ending Inventory Error Merchandise Inventory Current Assets Owner’s Equity Understated Understated Understated Understated Overstated Overstated Overstated Overstated

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