Acct 230 1st Edition Lecture 19Outline of Last Lecture I. Inventory and Cost of Goods Solda. Understanding Inventory and Cost of Goods Sold Outline of Current Lecture II. Inventory and Cost of Goods Solda. Recording Inventory TransactionsCurrent LectureIII. Recording Inventory Transactionsa. Record inventory transactions using a perpetual inventory systemi. Recall that from January 1 through December 31, Mario sold 800 games. Now let’s modify the example by giving exact dates for the sale of the 800 games—300 on July 17 and 500 on December 15. The exhibit shows the order of inventory transactions for Mario’s Game Shop, including the total cost of the inventory and the total revenue from the sale of the 800 games.ii. Inventory Purchases1. To record the purchase of new inventory, we debit inventory (an asset) to show that the company’s balance of this asset account has increased. At the same time, if the purchase was paid in cash, we credit cash. Or more likely, if the company made the purchase on account, we credit accounts payable, increasing total liabilities.iii. Inventory Sales1. We make two entries to record the sale: 2. The first entry shows an increase to the asset account (in this case, Accounts Receivable) and an increase in sales revenue.3. The second entry adjusts the Inventory and Cost of Goods Sold accounts.iv. Other inventory transactions1. On October 19, Mario purchased 600 additional units of inventory for $6,600 on account. These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.2. On December 15, Mario sold another 500 units for $15 each, on account. Again, we make two entries to record the sale: 3. The first increases Accounts Receivable and Sales Revenue ($7,500 = 500 units x $15 ). The second adjusts the Cost of Goods Sold and Inventory accounts ($5,300 = [100 units x $9] + [400 units x $11] ). 4. After recording all purchases and sales of inventory for the year, we can determine the ending balance of inventory by examining the postings to the ledger account. Thus, Mario’s ending inventory is $2,200, as shown in the inventory ledger account.v. Simple Adjustment from FIFO to LIFO.1. In practice, virtually all companies maintain their own inventory records using the FIFO assumption, because that’s how they typically sell their actual inventory. However, as discussed earlier, for preparing financial statements, many companies choose to report their inventory using the LIFO assumption. So, how does a company adjust its own inventory records maintained on a FIFO basis to LIFO basis for preparing financial statements? The adjustment is referred to as the LIFOadjustment , and you’ll see that this involves a very simple adjustment.2. In rare situations where the LIFO ending inventory balance is greater than the FIFO inventory balance (such as when inventory costs are declining), the entry for the LIFO adjustment would be reverse3. The inventory ledger account for Mario’s Game Shop after the LIFO adjustment. Notice that the balance of inventory has decreased to reflect the amount reported under the LIFO method.vi. Additional Inventory Transactions – Freight Charges1. Freight Charges: A significant cost associated with inventory for most merchandising companies includes freight (also calledshipping) charges. This includes the cost of shipments of inventory from suppliers, as well as the cost of shipments to customers. 2. When goods are shipped, they are shipped with terms FOB shipping point or FOB destination. FOB stands for “free onboard” and indicates when title (ownership) passes from the seller to the buyer. 3. FOB shipping point means title passes when the seller ships the inventory , not when the buyer receives it. The fact that a buyer does not have actual physical possession of the inventory does not prevent4. transfer of title to the buyer’s inventory. In contrast, if the seller ships the inventory5. FOB destination, then title does not transfer to the buyer when the inventory is shipped. The buyer would not record the purchase transaction until the shipped inventory reached its destination, the buyer’s location.vii. Additional Inventory Transactions – Purchase Discounts.1. Purchase Discounts: Discounts received for prompt payment of within a certain period is known as Purchase discounts. 2. Purchase discounts allow buyers to trim a portion of the cost of the purchase in exchange for payment within a certain period of time. 3. Buyers are not required to take purchase discounts, but many find it advantageous to do so.4. Purchase discounts allow buyers to trim a portion of the cost of the purchase in exchange for payment within a certain period of time. Buyers are not required to take purchase discounts, but many find it advantageous to do so. 5. Just as freight charges add to the cost of inventory and therefore increase the cost of goods sold once those items are sold, purchase discounts subtract from the cost of inventory and therefore reduce cost of goods sold once those items are sold.viii. Additional Inventory Transactions – Purchase Returns.1. Purchase Returns. Occasionally, a company will find inventory items to be unacceptable for some reason—perhaps they are damaged or are different from what was ordered. In those cases, the company returns the items to the supplier and records the purchase return as a reduction in both Inventory and Accounts Payable.b. Prepare a multiple-step income statementi. Mario sold 800 units during the year for $15 each (or $12,000 total). This amount is reported as net sales. From net sales, we subtract the cost of the 800 ($8,046) units sold. The difference between net salesof inventory and the cost of that inventory is the company’s gross profit. Mario’s gross profit is $3,954.ii. After gross profit, we see that the next item reported is selling, general, and administrative expenses, often referred to as operating expenses. We discussed several types of operating expenses in earlier chapters—wages, utilities, advertising, supplies, rent, insurance, and bad debts. These costs are normal for operating most companies. Gross profit reduced by these operating expenses is referred to as operating income (or sometimes referred to as income from operations ).iii. After operating income, a company reports nonoperating revenues and expenses . Nonoperating revenues and expenses arise from