ACCT 215 Autumn 2013 1 Accounting for Inventory – Part I What costs are included/excluded in the value of inventory? • General rule: Include all costs needed to get the item ready for sale. 1. Cost of the goods: YES 2. Shipping costs a. F.O.B. shipping point: YES b. F.O.B. destination: NO 3. Purchase returns, allowances, and discounts: YES • When we include a cost in the value of the inventory, we call this “capitalizing” • We end up expensing these costs in the same period we sell the inventory as a result of the matching principle. Manufacturing inventory versus merchandising inventory (see Exhibit 7.2) Manufacturing inventory consists of three categories: 1. Raw materials inventory 2. Work-in-process inventory 3. Finished-goods inventory Merchandising (often called “retail”) inventory consists of one category: 1. Inventory Tracking inventory and related costs • Beginning Inventory + Purchases During Period = Goods Available for Sale • Goods Available for Sale – Ending Inventory = Cost of Goods Sold **Remembering that “Purchases” includes the sum of all costs incurred in bringing an article to usable or salable condition and location** Perpetual method • Maintains a continuous record of inventory purchased and sold (we have only been using this method so far) Periodic method • Periodically adjusts for purchases and sales of inventory at the end of the reporting period based on a physical count of inventory • Uses multiple placeholder accounts (e.g., purchases, freight-in, purchase returns, purchase discounts), which are closed into inventory at the end of the reporting period Inventory Beginning Inventory Add: Purchases of Inventory Deduct: Cost of Goods Sold Ending InventoryACCT 215 Autumn 2013 2 Practice Problem #1: At the beginning of July, CD City has a balance in inventory of $2,900. CD City has the following transactions during the month of July: July 3 Purchases CDs on account from Wholesale Music for $1,800, terms 2/10, n/30 July 4 Pays $100 in freight charges related to the July 3 purchase from Wholesale Music July 9 Returns incorrectly ordered CDs to Wholesale Music and receives a $300 credit July 11 Pays Wholesale Music in full July 12 Sells CDs to customers on account, $4,800, that had a cost of $2,500 July 15 Receives full payment from customers related to the sale on July 12 July 18 Purchases CDs on account from Music Supply for $1,800, terms 1/10, n/30 July 22 Sells CDs to customers for cash, $3,700, that had a cost of $1,800 July 27 Grants a cash refund of $400 to customers who purchased CDs on July 22 and subsequently returned them July 28 Returns CDs to Music Supply and receives credit of $200 July 30 Pays Music Supply in full Required: 1. Assuming CD City uses a periodic inventory system, record the transactions using the following account titles: cash, accounts receivable, inventory, accounts payable, sales, sales returns, cost of goods sold, purchases, purchase returns, purchase discounts, and freight-in. 2. Record the month-end adjustment to inventory, assuming that a final count reveals ending inventory has a cost of $1,770. 3. Prepare the top section of the multiple-step income statement through gross profit for the month of July. Practice Problem #2: Refer to the transactions of CD City in Practice Problem #1, above. Required: 1. Assuming CD City uses a perpetual inventory system, record transactions using the following account titles: cash, accounts receivable, inventory, accounts payable, sales, sales returns, and cost of goods sold. 2. Calculate ending inventory and cost of goods sold. How do these amounts compare to those reported in Practice Problem #1?ACCT 215 Autumn 2013 3 Practice Problem #1 Requirement 1 July 3 Debit Credit Purchases 1,800 Accounts Payable 1,800 (Purchases inventory on account) July 4 Freight-In 100 Cash 100 (Pays freight-in) July 9 Accounts Payable 300 Purchase Returns 300 (Returns inventory bought on account) July 11 Accounts Payable 1,500 Purchase Discounts 30 Cash 1,470 (Pays down account less 2% discount) (Purchase discount = $1,500 X 2%) July 12 Accounts Receivable 4,800 Sales 4,800 (Sells inventory on account) July 15 Cash 4,800 Accounts Receivable 4,800 (Receives cash for 7/12 sales) July 18 Purchases 1,800 Accounts Payable 1,800 (Purchases inventory on account)ACCT 215 Autumn 2013 4 July 22 Debit Credit Cash 3,700 Sales 3,700 (Sells inventory for cash) July 27 Sales Returns 400 Cash 400 (Provides cash refund on inventory) July 28 Accounts Payable 200 Purchase Returns 200 (Returns inventory bought on account) July 30 Accounts Payable 1,600 Cash 1,600 (Pays cash for past purchases made on account) Requirement 2 July 31 Debit Credit Cost of Goods Sold 4,300 Purchase Returns 500 Purchase Discounts 30 Inventory (ending) 1,770 Inventory (beginning) 2,900 Purchases 3,600 Freight-In 100 (Adjusts inventory)ACCT 215 Autumn 2013 5 Requirement 3 CD City Multiple-step Income Statement (partial) For the month of July Net sales: Total sales $8,500 Less: Sales returns (400) Net sales $8,100 Cost of goods sold: Beginning inventory 2,900 Add: Purchases Freight-in 3,600 100 Less: Purchase returns Purchase discounts (500) (30) Cost of goods available for sale 6,070 Less: Ending inventory (1,770) Cost of goods sold 4,300 Gross Profit $3,800ACCT 215 Autumn 2013 6 Practice Problem #2 Requirement 1 July 3 Debit Credit Inventory 1,800 Accounts Payable 1,800 (Purchases inventory on account) July 4 Inventory 100 Cash 100 (Pays freight-in) July 9 Accounts Payable 300 Inventory 300 (Returns inventory bought on account) July 11 Accounts Payable 1,500 Inventory 30 Cash 1,470 (Pays down account less 2% discount) (Purchase discount = $1,500 X 2%) July 12 Accounts Receivable 4,800 Sales 4,800 (Sells inventory on account) Cost of Goods Sold 2,500 Inventory 2,500 (Cost of inventory sold) July 15 Cash 4,800 Accounts Receivable 4,800 (Receives cash for 7/12 sales)ACCT 215 Autumn 2013 7 July 18 Debit Credit Inventory 1,800 Accounts Payable 1,800 (Purchases inventory on account) July 22 Cash 3,700 Sales 3,700 (Sells inventory for cash) Cost of Goods Sold 1,800 Inventory 1,800 (Cost of inventory sold) July 27 Sales Returns 400 Cash 400 (Provides cash refund on inventory)