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Inventory SystemsInventory Systems
periodic
perpetual
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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
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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
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Physical Inventory ProceduresPhysical Inventory Procedures
• necessity for both periodic and perpetual• goal: count every item; do not count any
item twice
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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
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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
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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
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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
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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
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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
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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
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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
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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
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P
EI
BI
Importance of Importance of InventoryInventory
COGS
GAFS
To Balance Sheet
To IncomeStatement
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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
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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
•in reverse order in which expenditures were made
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Arbitrary Assumptions Arbitrary Assumptions Concerning Concerning CostCost Flow Flow
•in order expenditures were made -- FIFO
•in reverse order in which expenditures were made -- LIFO
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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
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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
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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
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Balance Sheet Income Statement
MI COGS
FIFO LIFO FIFO LIFO
Rising Prices
NI
Time Time Time Time Time Time Time Time Time
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InventoryInventory