ACCT 215 Autumn 2013 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 Inventory Beginning Inventory Add Purchases of Inventory Ending Inventory Deduct Cost of Goods Sold 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 1 ACCT 215 Autumn 2013 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 July 4 July 9 July 11 July 12 July 15 July 18 July 22 July 27 July 28 July 30 Purchases CDs on account from Wholesale Music for 1 800 terms 2 10 n 30 Pays 100 in freight charges related to the July 3 purchase from Wholesale Music Returns incorrectly ordered CDs to Wholesale Music and receives a 300 credit Pays Wholesale Music in full Sells CDs to customers on account 4 800 that had a cost of 2 500 Receives full payment from customers related to the sale on July 12 Purchases CDs on account from Music Supply for 1 800 terms 1 10 n 30 Sells CDs to customers for cash 3 700 that had a cost of 1 800 Grants a cash refund of 400 to customers who purchased CDs on July 22 and subsequently returned them Returns CDs to Music Supply and receives credit of 200 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 2 ACCT 215 Autumn 2013 Practice Problem 1 Requirement 1 July 3 Purchases Accounts Payable Purchases inventory on account Debit Credit 1 800 1 800 July 4 Freight In Cash Pays freight in 100 100 July 9 Accounts Payable Purchase Returns Returns inventory bought on account 300 300 July 11 Accounts Payable Purchase Discounts Cash Pays down account less 2 discount Purchase discount 1 500 X 2 1 500 30 1 470 July 12 Accounts Receivable Sales Sells inventory on account 4 800 4 800 July 15 Cash 4 800 Accounts Receivable Receives cash for 7 12 sales 4 800 July 18 Purchases Accounts Payable Purchases inventory on account 1 800 1 800 3 ACCT 215 Autumn 2013 July 22 Debit Cash 3 700 Sales Sells inventory for cash Credit 3 700 July 27 Sales Returns Cash Provides cash refund on inventory 400 400 July 28 Accounts Payable Purchase Returns Returns inventory bought on account 200 200 July 30 Accounts Payable 1 600 Cash Pays cash for past purchases made on account 1 600 Requirement 2 July 31 Debit Cost of Goods Sold Purchase Returns Purchase Discounts Inventory ending Inventory beginning Purchases Freight In Adjusts inventory 4 300 500 30 1 770 Credit 2 900 3 600 100 4 ACCT 215 Autumn 2013 Requirement 3 CD City Multiple step Income Statement partial For the month of July Net sales Total sales Less Sales returns Net sales Cost of goods sold Beginning inventory Add Purchases Freight in Less Purchase returns Purchase discounts Cost of goods available for sale Less Ending inventory Cost of goods sold Gross Profit 8 500 400 8 100 2 900 3 600 100 500 30 6 070 1 770 4 300 3 800 5 ACCT 215 Autumn 2013 Practice Problem 2 Requirement 1 July 3 Debit Inventory Accounts Payable Purchases inventory on account 1 800 Credit 1 800 July 4 Inventory Cash Pays freight in 100 100 July 9 Accounts Payable Inventory Returns inventory bought on account 300 300 July 11 Accounts Payable Inventory Cash Pays down account less 2 discount Purchase discount 1 500 X 2 1 500 30 1 470 July 12 Accounts Receivable Sales Sells inventory on account 4 800 Cost of Goods Sold Inventory Cost of inventory sold 2 500 4 800 2 500 July 15 Cash 4 800 Accounts Receivable Receives cash for 7 12 sales 4 800 6 ACCT 215 Autumn 2013 July 18 Debit Inventory Accounts Payable Purchases inventory on account 1 800 Credit 1 800 July 22 Cash 3 700 Sales Sells inventory for cash Cost of Goods Sold Inventory Cost of inventory sold 3 700 1 800 1 800 July 27 Sales Returns Cash Provides cash refund on inventory 400 400 July 28 Accounts Payable Inventory Returns inventory bought on account 200 200 July 30 Accounts Payable 1 600 Cash Pays cash for past purchases made on account 1 600 7 ACCT 215 Autumn 2013 Requirement 2 Ending inventory 2 900 1 800 100 300 30 2 500 1 800 1 800 200 beginning purchase on July 3 freight in on July 4 purchase return on July 9 purchase discount on July 11 sale on July 12 purchase on July 18 sale on July 22 purchase return on July 28 1 770 Cost of goods sold 2 500 1 800 sale on July 12 sale on