Reporting and AnalysingInventory

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

Recording Purchases of Inventory1. Purchase of inventoryPurchases 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)

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)

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)

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 Cash 3 430 Discount Received ($3500 x 0.02)

70 (To record payment to PW Audio Supply within the discount period)

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)

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)

Recording Sales of Inventory (cont’d)

3. Sales discountsExample:PW Audio Supply Ltd receives cash of

$3430 from Sauk Stereo after allowing 2% discount.

May 12 Cash 3 430 Discount Allowed ($3500 x 0.02) 70 Accounts Receivable ($3800 – $300) 3

500 (To record collection from Sauk Stereo within discount period)

Determining Cost of Goods PurchasedAccounts used to record purchases

Periodic Debit or Effect on cost of Item account title credit entry goods purchased

Invoice price Purchases Debit Increase

Freight charges Freight-in Debit Increasepaid by purchaser

Purchase returnsPurchase Credit Decreaseand allowances Returns granted by seller& Allowances

PW AUDIO SUPPLY LTDIncome Statement

for the year ended 30 June 2008Sales revenue

Gross sales revenue $480 000Less: Sales returns & allowances 20 000Net sales 460 000

Cost of goods soldInventory, 1 July 2007 $ 36 000Purchases $325 000Less: Purchase ret. & allow. 17 200Net purchases 307 800Add: Freight-in 12 200Cost of goods purchased 320 000Cost of goods available for sale 356 000Inventory, 30 June 2008 40 000Cost of goods sold 316 000

Gross profit 144 000Other operating revenue 24 000

168 000Operating expenses 125 000Profit before income tax 43 000

Less: Income tax expense 12 900Profit after tax $ 30 100