Perpetual Inventory System. Perpetual Inventory Detailed record of items in stock is kept up to date...
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Transcript of Perpetual Inventory System. Perpetual Inventory Detailed record of items in stock is kept up to date...
Perpetual Inventory System
Perpetual Inventory Detailed record of items in stock is kept up to date
on an ongoing basis As items sold, info. is transferred directly to store’s
central computer which is programmed to make the appropriate deductions from the inventory and make accounting entries
Sales returns are generally handled by separate department
System cannot automatically know when goods are lost, stolen or broken; therefore have to do manual check of inventory
Purchases When goods are purchased for resale, inventory
account is immediately updated by the cost price of the merchandise. At any time, the business can look in the general ledger and see the book value of the inventory on hand. Remember -- this is the book value and may not be 100% accurate (damaged goods, theft, clerical errors, etc.).
Merchandise Inventory (at Cost Price) 3800 Bank or A/P 3800
To record the Purchase of Inventory in Perpetual System
Purchase Returns & AllowancesPurchase Returns & Allowances
Goods purchased may be damaged, Goods purchased may be damaged, defective, of inferior quality, or they may defective, of inferior quality, or they may not meet purchaser’s specificationsnot meet purchaser’s specifications
Goods may be returned or purchase price Goods may be returned or purchase price may be reduced (an allowance)may be reduced (an allowance)
Entry to record:Entry to record: Cash or Accounts payable 300Cash or Accounts payable 300
Merchandise Inventory (for amount of Merchandise Inventory (for amount of return or adjustment)return or adjustment) 300300
Quantity and Purchase DiscountsQuantity and Purchase Discounts
Quantity discount:Quantity discount: reduction in price reduction in price due to the quantity being purchaseddue to the quantity being purchased
Purchase discount:Purchase discount: reduction in price reduction in price due to early payment of amount duedue to early payment of amount due
Entry to record:Entry to record:
Accounts payable 3500Accounts payable 3500
Merchandise InventoryMerchandise Inventory (for amount of discount) 70(for amount of discount) 70
CashCash 34303430
Freight CostsFreight Costs Purchase agreement indicates when ownership of the Purchase agreement indicates when ownership of the
goods is transferred from buyer to sellergoods is transferred from buyer to seller FOB Shipping Point:FOB Shipping Point:
Buyer accepts ownership at place of shipping and pays Buyer accepts ownership at place of shipping and pays for shipping costsfor shipping costs
Merchandise Inventory 150Merchandise Inventory 150CashCash 150150
FOB Destination:FOB Destination: Buyer accepts ownership when goods are delivered to Buyer accepts ownership when goods are delivered to
buyer’s place of business and seller pays freight costsbuyer’s place of business and seller pays freight costs Seller debits Seller debits Freight OutFreight Out for cost of shipping for cost of shipping
Summary of Purchases
Merchandise Inventory(Purchase) May 4 3800 May 9 300 (Purchase Return)
(Freight) 4 150 14 70 (Purchase Discount)
Bal. 3580
Sale of Merchandise (two journal entries needed)
The first entry identifies the sale at the selling price. A second entry shows the merchandise going out of the business and the inventory account decreasing by the cost price of the goods (the price the business paid for the merchandise).
Step 1 Bank or Accounts Receivable (at Selling Price) 3800
Sales (at Selling Price) 3800 To record the sale of merchandise in a perpetual system
Step 2: Cost of Goods Sold (at cost price) 2400
Merchandise Inventory (at cost price) 2400 To record the inventory sold at cost price in a perpetual system
Sales TaxesSales Taxes
Collected by merchandising Collected by merchandising companies on the goods that they sellcompanies on the goods that they sell
Periodically remitted to governmentPeriodically remitted to government Sales taxes collected are not revenueSales taxes collected are not revenue
Treated as a liability until paid (as they Treated as a liability until paid (as they are due to the government)are due to the government)
recorded in HST Payable accountrecorded in HST Payable account
Sales Returns & AllowancesSales Returns & Allowances Sales returns:Sales returns: when customers return merchandise to when customers return merchandise to
seller for credit or refundseller for credit or refund Sales allowances:Sales allowances: when seller grants customers a when seller grants customers a
price reductionprice reduction Seller’s entry required:Seller’s entry required: Sales returns and allowances 300Sales returns and allowances 300
Accounts receivable or cash 300Accounts receivable or cash 300 If merchandise returned, additional entry required:If merchandise returned, additional entry required:Merchandise inventory 140 Merchandise inventory 140 (recorded at orig. cost)(recorded at orig. cost)
Cost of goods sold Cost of goods sold 140140To record cost of returned goods.To record cost of returned goods.
Quantity and Sales Quantity and Sales DiscountsDiscounts
Quantity discount:Quantity discount:Reduction in selling price due to the Reduction in selling price due to the
volume of goods purchasedvolume of goods purchasedSale is recorded at reduced priceSale is recorded at reduced price
Sales discount:Sales discount:Discount offered for early payment of billDiscount offered for early payment of billDiscount amount taken is debited to Discount amount taken is debited to Sales Sales
DiscountsDiscounts (a contra revenue account)(a contra revenue account)Original amount in Sales is not changedOriginal amount in Sales is not changed
Journal Entry
Cash 3430
Sales Discount 70
Accounts Receivable 3500
To record collection of invoice #731 within discount period
Summary of Sales Transactions
Sales Sales Returns & Allowances
May 4 3800 May 9 300
Sales Discounts Cost of Goods Sold
May 14 70 May 4 2400 May 9 140
Bal. 2260
COGS
Cost of beginning inventory + cost of goods purchased = Cost of goods available for sale – cost of ending inventory = cost of goods sold
i.e.42500+143000=185500-36400 = 149100 COGS
Calculation is completed after each sale
Completing the Accounting Completing the Accounting CycleCycle
Same types of adjusting entries as a service Same types of adjusting entries as a service companycompany
One additional adjustment for inventoryOne additional adjustment for inventory To ensure the recorded inventory amount agrees with To ensure the recorded inventory amount agrees with
the actual quantity on handthe actual quantity on hand A physical count is an important control feature A physical count is an important control feature
A perpetual system indicates what should be thereA perpetual system indicates what should be there An inventory count will determine what existsAn inventory count will determine what exists
Additional accounts to be closed: Additional accounts to be closed: Sales, Sales Sales, Sales Returns and Allowances, Sales Discounts, Cost of Returns and Allowances, Sales Discounts, Cost of Goods Sold, Freight OutGoods Sold, Freight Out
Merchandise Inventory
Inventory counted at fiscal year-end It becomes the beginning inventory figure for
the next fiscal period If the amount on hand is different than what
is displayed in the merchandise inventory account, an adjustment needs to be made
Adjusting Entry
Cost of Goods Sold 500
Merchandise Inventory 500
To record difference between inventory records and physical units on hand.
Financial Statements
Merchandisers use the classified balance sheet
Two forms of income statements are widely used: multiple-step and single-step
Multiple-Step Income Statement
Five main steps:1. Net Sales2. Gross Profit3. Income from Operations4. Non-operating Activities (interest, dividend
revenue, gains from sale of property, interest expense, losses)
5. Net Income
Multiple-Step Income StatementMultiple-Step Income Statement
Sales revenueSales 480,000$ Less: Sales returns and allowances 16,700$ Sales discounts 4,300 21,000
Net sales 459,000 Cost of goods sold 315,000 Gross profit 144,000
Operating expenses Salaries expense 45,000$ Rent expense 19,000 Utilities expense 17,000 Advertising expense 16,000 Amortization expense 8,000 Freight out 7,000 Insurance expense 2,000
Total operating expenses 114,000 Income from operations 30,000
Other revenuesInterest revenue 3,000$ Gain on sale of equipment 600
Total non-operating revenue and gain 3,600 Other expenses
Interest on expense 1,800$ Casualty loss from vandalism 200
Total non-operating expense and loss 2,000 Net non-operating revenue 1,600
Net income 31,600$
HIGHPOINT ELECTRONICIncome Statement
Year Ended May 31, 2008Sales revenue
Sales 480,000$ Less: Sales returns and allowances 16,700$ Sales discounts 4,300 21,000
Net sales 459,000 Cost of goods sold 315,000 Gross profit 144,000
Operating expenses Salaries expense 45,000$ Rent expense 19,000 Utilities expense 17,000 Advertising expense 16,000 Amortization expense 8,000 Freight out 7,000 Insurance expense 2,000
Total operating expenses 114,000 Income from operations 30,000
Other revenuesInterest revenue 3,000$ Gain on sale of equipment 600
Total non-operating revenue and gain 3,600 Other expenses
Interest on expense 1,800$ Casualty loss from vandalism 200
Total non-operating expense and loss 2,000 Net non-operating revenue 1,600
Net income 31,600$
HIGHPOINT ELECTRONICIncome Statement
Year Ended May 31, 2008
Calculation of Net sales and Calculation of Net sales and Gross profitGross profit
Calculation of Income from Calculation of Income from operationsoperations
Calculation of Non-operating Calculation of Non-operating activities and Net incomeactivities and Net income
Single-Step Income StatementSingle-Step Income Statement
All data are classified as eitherAll data are classified as either
(1) revenues or (2) expenses(1) revenues or (2) expenses
RevenuesNet sales $459,000Interest revenue 3,000Gain on sale of equipment 600
Total Revenues 462,600
ExpensesCost of goods sold $315,000Operating expenses 114,000Interest expense 1,800Casualty loss from vandalism 200
Total expenses 431,000
Net income 31,600$
HIGHPOINT ELECTRONICIncome Statement
Year Ended May 31, 2008Revenues
Net sales $459,000Interest revenue 3,000Gain on sale of equipment 600
Total Revenues 462,600
ExpensesCost of goods sold $315,000Operating expenses 114,000Interest expense 1,800Casualty loss from vandalism 200
Total expenses 431,000
Net income 31,600$
HIGHPOINT ELECTRONICIncome Statement
Year Ended May 31, 2008
Classified Balance SheetClassified Balance Sheet
Current assetsCash 9,500$ Accounts receivable 16,100 Merchandise inventory 40,000 P repaid insurance 1,800
Total current assets 67,400 P roperty, plant, and equipment
Store equipment 80,000$ Less: Accumulated amortization 24,000 56,000
Total assets 123,400$
HIGHPOINT ELECTRONICBalance Sheet (partial)
May 31, 2008
AssetsCurrent assets
Cash 9,500$ Accounts receivable 16,100 Merchandise inventory 40,000 P repaid insurance 1,800
Total current assets 67,400 P roperty, plant, and equipment
Store equipment 80,000$ Less: Accumulated amortization 24,000 56,000
Total assets 123,400$
HIGHPOINT ELECTRONICBalance Sheet (partial)
May 31, 2008
Assets
Merchandise Merchandise Inventory Inventory reported as a reported as a current asset current asset following following Accounts Accounts ReceivableReceivable
Gross Margin Ratio
The relation between sales and COGS
Gross Margin/Net Sales = Gross Margin Ratio
i.e.
(in millions) $645.1 /$1396.5 = 46.2%
Means that each $1 of sales yields about 46.2 cents in gross margin to cover all other expenses