copyright © 1999, 2002 by m. ray gregg. all rights reserved.1
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Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 1
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 2
Inventory SystemsInventory Systems
periodic
perpetual
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 3
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
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 4
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, 2002 by M. Ray Gregg. All Rights Reserved. 5
Physical Inventory ProceduresPhysical Inventory Procedures
• necessity for both periodic and perpetual• goal: count every item; do not count any
item twice
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 6
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
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 7
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 8
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 9
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 10
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 11
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 12
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, 2002 by M. Ray Gregg. All Rights Reserved. 13
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, 2002 by M. Ray Gregg. All Rights Reserved. 14
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, 2002 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
• shipping terms determine when title passes– FOB SP
Copyright © 1999, 2002 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– FOB SP -- title passes when goods are shipped
Copyright © 1999, 2002 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 -- title passes when goods are shipped– FOB D
Copyright © 1999, 2002 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– FOB D -- title passes when goods arrive
BUYER
D
Mack’s Trucking
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 19
Importance of Importance of InventoryInventory
Importance of Importance of InventoryInventory
• most active element of a merchandising business
• principal source of revenue
• largest current asset
• largest deduction from revenue
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 20
P
EI
BI
Importance of Importance of InventoryInventory
COGS
GAFS
To Balance Sheet
To IncomeStatement
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 21
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
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 23
Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 24
Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
•in reverse order in which expenditures were made
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 25
Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
•in reverse order in which expenditures were made -- LIFO
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 26
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
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 27
Balance Sheet Income Statement
MI COGS
First In … First OUT
Latest Ite
ms Left O
ver
Time Time Time Time Time Time Time Time Time
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 28
Balance Sheet Income Statement
MI COGS
Las
t In
Firs
t OU
TOldest Item
s Left
Time Time Time Time Time Time Time Time Time
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 29
Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
Copyright © 1999, 2002 by M. Ray Gregg. All Rights Reserved. 30
InventoryInventory
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