Inventory and Accounting for Merchandisers Module 6.
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Transcript of Inventory and Accounting for Merchandisers Module 6.
SAP 2007 / SAP University Alliances Introductory Accounting
Computing Net Income
Net Sales
Cost of Goods Sold
Gross Profit
Operating Expenses
Net Income Net Income
Operating Expenses
Revenue
Merchandiser Service Company
SAP 2007 / SAP University Alliances Introductory Accounting
May. 1 Inventory 66,000 Accounts Payable 6,000 Purchased inventory on account
May. 4 Accounts Payable 2,000 Inventory 2,000
Defective merchandise returned to supplier.
Purchases
Purchase Returns and Allowances
Perpetual System-Example
SAP 2007 / SAP University Alliances Introductory Accounting
Terms
Time
Due
Discount Period = 10 days
(Full amount minus 2% discount) due between
May.1 and May.11
Credit Period = 30 days
Full amount due anytime between
Mayt.12 and May.31
Purchase or Sale
May.1 May.11 May.31
Purchase/Sales Discounts
SAP 2007 / SAP University Alliances Introductory Accounting
Purchase Discounts- Assume the purchase of inventory on May 1 was on the terms 2/10,n30.
Case 1-Discount takenMay.11 Accounts Payable 644,000 Inventory 80 Cash 3,920 2% x (6,000 - 2,000) = 80 Case 2-Discount not taken Oct.31 Accounts Payable 4,000 Cash 4,000
Perpetual System — Example
SAP 2007 / SAP University Alliances Introductory Accounting
FOB Shipping Point(Buyer pays
shipping charges)
FOB Destination(Seller pays for
shipping charges)
Goods
Seller Buyer
Carrier
Transportation Charges — Perpetual System
SAP 2007 / SAP University Alliances Introductory Accounting
Transportation Charges
May. 2 Inventory 100 Accounts Payable 100
Transportation charges on goods purchased FOB shipping point.
Perpetual System — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Sales of Merchandise
May.15 Accounts Receivable 4,000 Sales 4,000 Sale of merchandise, terms 1/10, n30
Cost of goods sold 3,000 Inventory 3,000 To record cost of merchandise sold
Perpetual System — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Sales Returns and Allowances
Msy.17 Sales Returns & Allowance 400 Accounts Receivable 400 Defective merchandise returned
Inventory 300 Cost of Goods Sold 300 To record return of inventory
Perpetual System — Example
SAP 2007 / SAP University Alliances Introductory Accounting
Sales Discounts
Case 1- Discount taken
Perpetual System — Example
May.25 Cash 3,564 Sales Discounts 36 Accounts Receivable 3,600
1% X (4,000 - 400) = 36
Case 2- Discount not takenMay.25 Cash 3,600 Accounts Receivable 3,600
(4,000- 400)
SAP 2007 / SAP University Alliances Introductory Accounting
Inventory per accounting records: $187,000
Inventory per physical count: $184,200
Difference (shrinkage) $2,800
Adjustment required:
Perpetual System — Example
May.31 Cost of Goods Sold 2,800 Inventory 2,800
To record inventory shrinkage revealed by physical count.
SAP 2007 / SAP University Alliances Introductory Accounting
Sales 335,000$ Less: Sales discounts 4,250$
Sales returns and allowances 2,200 6,450 Net sales 328,550 Cost of goods sold 233,200 Gross profit 95,350 Operating expenses: Selling expenses:
Amortization expense, store 2,800$ Sales salaries expense 19,200 Rent expense 8,500 Store supplies expense 950 Advertising expense 12,600 44,050
General and administrative expenses:Amortization expense, office 800 Office salaries expense 26,500 Insurance expense 500 Rent expense 850 Office supplies 1,950 30,600
Total operating expenses 74,650 Income from operations 20,700 Other revenues and expenses:
Rent revenue 2,000 Interest expense (250) 1,750
Net income 22,450$
Samle CoIncome Statement
For Year Ended December 31, 2005Classified Multi-step
Format
SAP 2007 / SAP University Alliances Introductory Accounting
Sales, net 328,550$ Cost of goods sold 233,200 Gross profit 95,350 Operating expenses:
Amortization expense 3,600$ Salaries expense 45,700 Rent expense 9,350 Insurance expense 500 Supplies expense 2,900 Advertising expense 12,600 74,650
Income from operations 20,700 Other revenues and expenses:
Rent revenue 2,000 Interest expense (250) 1,750
Net income 22,450$
Sample CoIncome Statement
For Year Ended December 31, 2001
Multi-step
Format
SAP 2007 / SAP University Alliances Introductory Accounting
Revenues:Sales, net 328,550$ Rent revenue 2,000 Total revenues 330,550
Expenses:Cost of goods sold 233,200$ Selling expense 44,050 General and administrative expense 30,600 Interest expense 250 Total expenses 308,100
Net income 22,450$
Sample CoIncome Statement
For Year Ended December 31, 2005
Single- step
Format
SAP 2007 / SAP University Alliances Introductory Accounting
Periodic and Perpetual Inventory Systems Compared
Example
Purchases 5,000 Inventory 5,000
Accounts Payable 5,000 Accounts Payable 5,000
Purchase of Merchandise
Return of Merchandise
Accounts Payable 1,000 Accounts Payable 1,000
Purchase Returns 1,000 Inventory 1,000
Periodic System Perpetual System
SAP 2007 / SAP University Alliances Introductory Accounting
Example
Accounts Payable 4,000 Accounts Payable 4,000
Purchase Discounts 80 Inventory 80
Cash 3,920 Cash 3,920
Purchase Discount Taken (2/10, n30)
Transportation Charges
Transportation-in 100 Inventory 100
Accounts Payable 100 Accounts Payable 100
Periodic System Perpetual System
SAP 2007 / SAP University Alliances Introductory Accounting
Example
Accounts Receivable 4,000 Accounts Receivable 4,000
Sales 4,000 Sales 4,000
Cost of Goods Sold 3,000
Inventory 3,000
Sale of merchandise
Periodic System Perpetual System
SAP 2007 / SAP University Alliances Introductory Accounting
Example
Sales Returns 400 Sales Returns 400
Accounts Receivable 400 Accounts Receivable 400
Inventory 300
Cost of Goods Sold 300
Sales Return
Periodic System Perpetual System
SAP 2007 / SAP University Alliances Introductory Accounting
MerchandiseAvailable
for Sale
Net Costof Purchases
Cost ofGoods Sold
BeginningInventory
EndingInventory
Balance SheetBalance Sheet Income StatementIncome Statement
Merchandising Cost Flows
SAP 2007 / SAP University Alliances Introductory Accounting
SAP 2007 / SAP University Alliances Introductory Accounting
Specific Identification
Examples: Automobiles, custom furniture, art.
SAP 2007 / SAP University Alliances Introductory Accounting
Specific Identification — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 8 91$ 728$ 2 91$ 182$
12 106$ 1,272$ 3 106$ 318$
5 500$ 2 91$ 182$ 3 106$ 318$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,800$ 8/28 2 91$ 182$ 3 106$ 318$
12 115$ 1,380$ 8 115$ 920$ Totals 45 4,800$ 34 3,562$ 11 1,238$
Specific Identificaton Computations - Perpetual Inventory System
The opening inventory consists of 10 units @ $91/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
Specific Identification — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 8 91$ 728$ 2 91$ 182$
12 106$ 1,272$ 3 106$ 318$
5 500$ 2 91$ 182$ 3 106$ 318$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,800$ 8/28 2 91$ 182$ 3 106$ 318$
12 115$ 1,380$ 8 115$ 920$ Totals 45 4,800$ 34 3,562$ 11 1,238$
Specific Identificaton Computations - Perpetual Inventory System
This results in two layers of inventory.
Additional units are purchased @ $106/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
Specific Identification — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 8 91$ 728$ 2 91$ 182$
12 106$ 1,272$ 3 106$ 318$
5 500$ 2 91$ 182$ 3 106$ 318$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,800$ 8/28 2 91$ 182$ 3 106$ 318$
12 115$ 1,380$ 8 115$ 920$ Totals 45 4,800$ 34 3,562$ 11 1,238$
Specific Identificaton Computations - Perpetual Inventory System
On August 14, 20 units are sold. Eight of these units came from the opening inventory and the remaining 12
units came from the August 3 purchase.
SAP 2007 / SAP University Alliances Introductory Accounting
Specific Identification — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 8 91$ 728$ 2 91$ 182$
12 106$ 1,272$ 3 106$ 318$
5 500$ 2 91$ 182$ 3 106$ 318$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,800$ 8/28 2 91$ 182$ 3 106$ 318$
12 115$ 1,380$ 8 115$ 920$ Totals 45 4,800$ 34 3,562$ 11 1,238$
Specific Identificaton Computations - Perpetual Inventory System
This leaves 2 units remaining from the original inventory and 3 units remaining
from the August 3 purchase.
SAP 2007 / SAP University Alliances Introductory Accounting
FIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 10 91$ 910$
10 106$ 1,060$ 5 106$ 530$ 5 106$ 530$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,830$ 8/28 5 106$ 530$
9 115$ 1,035$ 11 115$ 1,265$ Totals 45 4,800$ 34 3,535$ 11 1,265$
FIFO Computations - Perpetual Inventory System
The opening inventory consists of 10 units @ $91/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
FIFO — Example
Additional units re purchased @ $106/unit.
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 10 91$ 910$
10 106$ 1,060$ 5 106$ 530$ 5 106$ 530$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,830$ 8/28 5 106$ 530$
9 115$ 1,035$ 11 115$ 1,265$ Totals 45 4,800$ 34 3,535$ 11 1,265$
FIFO Computations - Perpetual Inventory System
This results in two layers of inventory.
Additional units are purchased @ $106/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
FIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 10 91$ 910$
10 106$ 1,060$ 5 106$ 530$ 5 106$ 530$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,830$ 8/28 5 106$ 530$
9 115$ 1,035$ 11 115$ 1,265$ Totals 45 4,800$ 34 3,535$ 11 1,265$
FIFO Computations - Perpetual Inventory System
Under FIFO, units are assumed to be sold in the order acquired. Therefore, of the 20 units sold on August 14, the first 10 units come
from beginning inventory. Therefore, those 10 units are removed from the inventory record based on the cost of those units of $91.
SAP 2007 / SAP University Alliances Introductory Accounting
FIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 10 91$ 910$
10 106$ 1,060$ 5 106$ 530$ 5 106$ 530$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,830$ 8/28 5 106$ 530$
9 115$ 1,035$ 11 115$ 1,265$ Totals 45 4,800$ 34 3,535$ 11 1,265$
FIFO Computations - Perpetual Inventory System
The remaining 10 units sold on August 14th come from the next purchase, made on August 3rd. Therefore, these units are removed
from the inventory record based on their cost of $106.
SAP 2007 / SAP University Alliances Introductory Accounting
FIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 10 91$ 910$
10 106$ 1,060$ 5 106$ 530$ 5 106$ 530$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,830$ 8/28 5 106$ 530$
9 115$ 1,035$ 11 115$ 1,265$ Totals 45 4,800$ 34 3,535$ 11 1,265$
FIFO Computations - Perpetual Inventory System
The ending inventory consists of the 5 remaining units from the August 3 purchase.
SAP 2007 / SAP University Alliances Introductory Accounting
LIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 15 106$ 1,590$
5 91$ 455$ 5 91$ 455$ 5 91$ 455$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,755$ 8/28 14 115$ 1,610$ 5 91$
Totals 45 4,800$ 34 3,655$ 11 1,145$
LIFO Computations - Perpetual Inventory System
The opening inventory consists of 10 units @ $91/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
LIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 15 106$ 1,590$
5 91$ 455$ 5 91$ 455$ 5 91$ 455$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,755$ 8/28 14 115$ 1,610$ 5 91$
Totals 45 4,800$ 34 3,655$ 11 1,145$
LIFO Computations - Perpetual Inventory System
Additional units are purchased @ $106/unit.
This results in two layers of inventory.
SAP 2007 / SAP University Alliances Introductory Accounting
LIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 15 106$ 1,590$
5 91$ 455$ 5 91$ 455$ 5 91$ 455$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,755$ 8/28 14 115$ 1,610$ 5 91$
Totals 45 4,800$ 34 3,655$ 11 1,145$
LIFO Computations - Perpetual Inventory System
Of the 20 units sold, these units are assumed to be sold
first.
SAP 2007 / SAP University Alliances Introductory Accounting
LIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 15 106$ 1,590$
5 91$ 455$ 5 91$ 455$ 5 91$ 455$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,755$ 8/28 14 115$ 1,610$ 5 91$
Totals 45 4,800$ 34 3,655$ 11 1,145$
LIFO Computations - Perpetual Inventory System
Once the latest units purchased are sold, units are sold from the
previous purchase.
SAP 2007 / SAP University Alliances Introductory Accounting
LIFO — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 10 91$ 910$
8/3 15 106$ 1,590$ 15 106$ 1,590$
25 2,500$ 8/14 15 106$ 1,590$
5 91$ 455$ 5 91$ 455$ 5 91$ 455$
8/17 20 115$ 2,300$ 20 115$ 2,300$
25 2,755$ 8/28 14 115$ 1,610$ 5 91$
Totals 45 4,800$ 34 3,655$ 11 1,145$
LIFO Computations - Perpetual Inventory System
This leaves 5 units remaining from the first purchase.
SAP 2007 / SAP University Alliances Introductory Accounting
Cost of goods available for sale
Number of units available for sale
Moving Weighted Average Method
Average cost per unit
=
SAP 2007 / SAP University Alliances Introductory Accounting
Moving Weighted Average — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 8/3 15 106$ 1,590$ 25 100$ 2,500$
8/14 20 100$ 2,000$ 5 100$ 500$
8/17 20 115$ 2,300$ 25 112$ 2,800$
8/28 14 112$ 1,568$ 11 112$ 1,232$
Totals 45 4,800$ 34 3,568$ 11 1,232$
Moving Weighted Average Computations - Perpetual Inventory System
The opening inventory consists of 10 units @ $91/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
Moving Weighted Average — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 8/3 15 106$ 1,590$ 25 100$ 2,500$
8/14 20 100$ 2,000$ 5 100$ 500$
8/17 20 115$ 2,300$ 25 112$ 2,800$
8/28 14 112$ 1,568$ 11 112$ 1,232$
Totals 45 4,800$ 34 3,568$ 11 1,232$
Moving Weighted Average Computations - Perpetual Inventory System
Additional units are purchased @ $106/unit. This results in an average cost of
$100/unit.
(10 x $91) + (15 x $106) 25 units
SAP 2007 / SAP University Alliances Introductory Accounting
Moving Weighted Average — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 8/3 15 106$ 1,590$ 25 100$ 2,500$
8/14 20 100$ 2,000$ 5 100$ 500$
8/17 20 115$ 2,300$ 25 112$ 2,800$
8/28 14 112$ 1,568$ 11 112$ 1,232$
Totals 45 4,800$ 34 3,568$ 11 1,232$
Moving Weighted Average Computations - Perpetual Inventory System
These 20 units are sold at the average cost of $100/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
Moving Weighted Average — Example
Purchases Sales BalanceDate Units Cost Total Units Cost Total Units Cost Total
8/1 10 91$ 910$ 10 91$ 910$ 8/3 15 106$ 1,590$ 25 100$ 2,500$
8/14 20 100$ 2,000$ 5 100$ 500$
8/17 20 115$ 2,300$ 25 112$ 2,800$
8/28 14 112$ 1,568$ 11 112$ 1,232$
Totals 45 4,800$ 34 3,568$ 11 1,232$
Moving Weighted Average Computations - Perpetual Inventory System
This leaves 5 units remaining at an average cost of $100/unit.
SAP 2007 / SAP University Alliances Introductory Accounting
Financial Reporting
Sample Company
Segment Income Statement - Mountain BikesMonth ending August 31, 2005
Specific Identification
Moving Weighted Average FIFO LIFO
Sales 4,760$ 4,760$ 4,760$ 4,760$ Cost of Goods Sold 3,562$ 3,568$ 3,535$ 3,655$
Gross Profit 1,198 1,192 1,225 1,105Operating expenses 374 374 374 374 Income from operations 824$ 818$ 851$ 731$
Merchandise Inventory 1,238$ 1,232$ 1,265$ 1,145$
August 31, 2001Balance Sheet
SAP 2007 / SAP University Alliances Introductory Accounting
Advantages of Each MethodAdvantages of Each Method
First-In, First-Out
First-In, First-Out
Ending inventory approximates
current replacement cost.
Ending inventory approximates
current replacement cost.
Weighted Average
Weighted Average
Smoothes out purchase price
changes.
Smoothes out purchase price
changes.
Last-In, First-Out
Last-In, First-Out
Better matches current costs in
cost of goods sold with revenues.
Better matches current costs in
cost of goods sold with revenues.
Financial Reporting
SAP 2007 / SAP University Alliances Introductory Accounting
Inventory Errors — Effects on the Income Statement
SAP 2007 / SAP University Alliances Introductory Accounting
Inventory Errors — Effects on the Balance Sheet