© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 1

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 2

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 3

Important Announcements

• Exam next ween in first discussion groups on Tu/W

• Be on time! (early)• Provide pencils, calculators

(no cell phones)• Voluntary review (tentative) Sunday at

3 p.m. (announced officially later this week)

• Will go over exam on Thur/Fri; need to be present to learn score

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 4

Inventory SystemsInventory Systems

periodic

perpetual

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Perpetual InventoryPerpetual Inventory• Continuously discloses inventory on hand• increases in inventory debited to Merchandise Inventory

(and posted to subsidiary ledger)• two entries to record sales transactions REVENUE: Accounts Receivable -- Customer retail Sales retail

REDUCTION IN INVENTORY:Cost of Goods Sold cost

Merchandise Inventory cost• physical inventory still needed annually to compare with

and update inventory records

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 6

Periodic InventoryPeriodic Inventory• increases recorded in Purchases• at time of sale, record revenue

but no entry for reduction in inventory

• physical inventory (actual count) necessity at end of period to determine cost of goods sold

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Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice

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Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count

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© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 10

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 11

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 12

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 13

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Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 15

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 16

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 17

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any

item twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 18

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 19

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped– FOB D

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 20

Physical Inventory ProceduresPhysical Inventory Procedures• necessity for both periodic and perpetual• goal: count every item; do not count any item

twice• have plan and follow it

– establish proper “cut-off” of transactions– business often closes in order to count– best to count in “teams” of two

• shipping terms determine when title passes– FOB SP -- title passes when goods are shipped– FOB D -- title passes when goods arrive

BUYER

D

Mack’s Trucking

© Copyright 1999, 2005 by M. Ray Gregg. All Rights Reserved. 21

Importance of Importance of InventoryInventory

• most active element of a merchandising business

• principal source of revenue

• largest current asset• largest deduction

from revenue

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P

EI

BI

Importance of Importance of InventoryInventory

COGSGAFS

To Balance Sheet

To IncomeStatement

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Importance of Importance of InventoryInventory

Inventory Net Income Assets Capital

Effects of Misstatement

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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost FlowFlow

•in order expenditures were made

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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost FlowFlow

•in order expenditures were made -- FIFO

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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow

•in order expenditures were made -- FIFO

•in reverse order in which expenditures were made

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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow

•in order expenditures were made -- FIFO

•in reverse order in which expenditures were made -- LIFO

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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow

•in order expenditures were made -- FIFO

•in reverse order in which expenditures were made -- LIFO

•average of expenditures

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Balance Sheet Income Statement

MI COGS

First In … First OUTLatest I

tems Left O

ver Time Time Time Time Time Time Time Time Time

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Balance Sheet Income Statement

MI COGS

Las

t In

Firs

t OU

TOldest Items Left

Time Time Time Time Time Time Time Time Time

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Balance Sheet Income Statement

MI COGS

FIFO LIFO FIFO LIFO

Rising Prices

NI

Time Time Time Time Time Time Time Time Time

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InventoryInventory

Exercises

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InventoryInventory

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InventoryInventory

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