copyright © 1999, 2002 by m. ray gregg. all rights reserved.1


Inventory SystemsInventory Systems

periodic

perpetual


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


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


Physical Inventory ProceduresPhysical Inventory Procedures

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

item twice




item twice• have plan and follow it

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





– 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






• shipping terms determine when title passes– FOB SP



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

twice• have plan and follow it


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






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






• 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


Importance of Importance of InventoryInventory


• most active element of a merchandising business

• principal source of revenue

• largest current asset

• largest deduction from revenue


P

EI

BI


COGS

GAFS

To Balance Sheet

To IncomeStatement



Inventory Net Income Assets Capital

Effects of Misstatement


Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost FlowFlow

•in order expenditures were made


Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow

•in order expenditures were made -- FIFO




•in reverse order in which expenditures were made




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




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

•average of expenditures


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



MI COGS

Las

t In

Firs

t OU

TOldest Item

s Left




MI COGS

FIFO LIFO FIFO LIFO

Rising Prices

NI



InventoryInventory

copyright © 1999, 2002 by m. ray gregg. all rights reserved.1

Documents

ray gregg

perpetual inventory

periodic inventory increases

update inventory records

perpetual goal

fob sp slide

sales transactions revenue

record revenue