periodic (1)
TRANSCRIPT
-
8/2/2019 Periodic (1)
1/54
Perpetual systems maintain a running record
to show the inventory on hand at all times.
Periodic systems do not keep acontinuous record of inventory on hand.
Inventory Accounting Systems
-
8/2/2019 Periodic (1)
2/54
Periodic System
This type of inventory system does not keep an
updated record of all goods bought, sold and on
hand.
In a periodic system cost of goods sold is only
determined at the end of the accounting period
once inventory is counted.
This system is not as widely used as the perpetualsystem.
-
8/2/2019 Periodic (1)
3/54
Periodic System
At the end of the period make a physicalcount and apply unit cost to determineending inventory.
Inventory purchases are debited to thepurchases account.
The merchandise inventory account carries
the beginning inventory balance untiladjusted at period end.
-
8/2/2019 Periodic (1)
4/54
When merchandise is purchased for resale to
customers, the temporary account, Purchases, is
debited for the cost of goods.
Like sales, purchases may be made for cash or on
account (credit).
The purchase is normally recorded by the
purchaser when the goods are received from theseller.
Each credit purchase should be supported by a
purchase invoice.
PURCHASES OF
MERCHANDISE
-
8/2/2019 Periodic (1)
5/54
NORMAL BALANCES: COST OFGOODS PURCHASED ACCOUNTS
We used 4 accounts to record the purchase ofinventory under a periodic inventory system.
These accounts are:
NormalAccount Balance
PurchasesPurchase Returns and AllowancesPurchase DiscountsFreight-in
DebitCredit
Credit
Debit
-
8/2/2019 Periodic (1)
6/54
CHELSEA VIDEODate Account Titles and Explanation Debit Credit
May 4 Purchases 3,800Accounts Payable 3,800
(To record goods purchased onaccount, terms 2/10, n/30)
PERIODIC SYSTEMTRANSACTIONS
Purchases is a temporary account whose normal balance is a debit.
-
8/2/2019 Periodic (1)
7/54
CHELSEA VIDEODate Account Titles and Explanation Debit Credit
May 8 Accounts Payable 300Purchase Returns and Allowances 300
(To record return of inoperablegoods purchased from Highpoint
Electronic
PERIODIC SYSTEMTRANSACTIONS
Purchase Returns and Allowances is a temporary account whosenormal balance is a credit.
-
8/2/2019 Periodic (1)
8/54
Freight Costs -
On Incoming Inventory
-
8/2/2019 Periodic (1)
9/54
PERIODIC SYSTEMTRANSACTIONS
CHELSEA VIDEODate Account Titles and Explanation Debit Credit
May 9 Freight-in 150Cash 150
(To record payment of freight,terms FOB shipping point)
Freight-in is a temporary account whose normal balance is a debit.
-
8/2/2019 Periodic (1)
10/54
CHELSEA VIDEODate Account Titles and Explanation Debit Credit
May 14 Accounts Payable 3,500Purchase Discounts 70Cash 3,430
(To record payment to Highpoint
Electronic within the discountperiod)
PERIODIC SYSTEMTRANSACTIONS
Purchase Discounts is a temporary account whose normal balance is
a credit.
-
8/2/2019 Periodic (1)
11/54
To determine cost of goods purchased:
1 Subtract Purchase Returns and
Allowances and Purchase Discounts from
Purchases to produce net purchases.
2 Add Freight-in to net purchases to
produce cost of goods purchased.
COST OF GOODS
PURCHASED
-
8/2/2019 Periodic (1)
12/54
Purchases $ 325,000
Less: Purchase returns and allowances $ 10,400
Purchase discounts 6,800 17,200Net purchases 307,800
Net Purchases
NetPurchases are gross purchases
adjusted for returns and discounts.
-
8/2/2019 Periodic (1)
13/54
Cost of Goods Purchased
Purchases $ 325,000
Less: Purchase returns and allowances $ 10,400
Purchase discounts 6,800 17,200
Net purchases 307,800Add: Freight-in 12,200
Cost of goods purchased 320,000
Cost of goods purchased is netpurchases plus freight-in.
-
8/2/2019 Periodic (1)
14/54
Recording Inventory Purchases
-
8/2/2019 Periodic (1)
15/54
Recording Inventory Sales
-
8/2/2019 Periodic (1)
16/54
COST OF GOODS SOLD
To determine the cost of goods sold
under a periodic inventory system, it is
necessary to:
1 record purchases of merchandise,
2 determine the cost of goods purchased,
and3 determine the cost of goods on hand at
the beginning and end of the accounting
period.
-
8/2/2019 Periodic (1)
17/54
DETERMINING COST
OF GOODS SOLD
Computing cost of goods sold involves 2 steps:
1 Add the cost of goods purchased to the
beginning cost of goods on hand to obtainthe cost of goods available for sale.
2 Subtract the ending cost of goods on hand
from the cost of goods available for sale to
arrive at the cost of goods sold.
-
8/2/2019 Periodic (1)
18/54
Cost of Goods Sold is determined as follows:
Beginning inventory $ 36,000
Add: Cost of goods purchased 320,000
Cost of goods available for sale 356,000
Less: Ending inventory 40,000Cost of goods sold $ 316,000
COMPUTATION OF COST OF GOODS AVAILABLEFOR SALE AND COST OF GOODS SOLD
-
8/2/2019 Periodic (1)
19/54
INCOME STATEMENT FOR A MERCHANDISINGCOMPANY USING A PERIODIC INVENTORY SYSTEM
HIGHPOINT ELECTRONIC INC.Income Statement
For the Year Ended December 31, 1996Sales revenues
Sales $480,000Less: Sales returns and allowances $ 12,000
Sales discounts 8,000 20,000
Net sales 460,000Cost of goods sold
Inventory, January 1 36,000
Purchases $325,000Less: Purchases returns and allowances 10,400
Purchases discounts 6,800
Net purchases 307,800Add: Freight-in 12,200
Cost of goods purchased 320,000
Cost of goods available for sale 356,000Inventory, December 31 40,000
Cost of goods sold 316,000
Gross profit 144,000
Operating expensesStore salaries expense 45,000Rent expense 19,000Utilities expense 17,000Advertising expense 16,000Depreciation expense store equipment 8,000Freight-out 7,000Insurance expense 2,000
Total operating expenses 114,000
Net income $ 30,000
The income statement under a
periodic inventory system
contains 3 distinctive features:
1 a sales revenue section,2 a cost of goods sold section, and
3 gross profit.
-
8/2/2019 Periodic (1)
20/54
Compute periodic inventory
amounts underweighted-average cost,
FIFO, and LIFO.
Objective
-
8/2/2019 Periodic (1)
21/54
DETERMINING COST
OF GOODS ON HAND
Under the periodic method, cost of inventory
on hand is determined from a physical
inventory requiring:
1 Counting the units on hand for each
inventory item.
2 Applying unit costs to the total units on
hand for each inventory item.3 Aggregating the cost of each item of
inventory to determine total cost of goods
on hand.
-
8/2/2019 Periodic (1)
22/54
Taking a Physical Inventory
Counting, weighting or measuring
each type of inventory
Determining ownership of goods Quantity of each kind of inventory
listed on inventory summary sheets
where unit costs are applied
-
8/2/2019 Periodic (1)
23/54
ALLOCATINGINVENTORIABLE COSTS
Inventoriable costs are allocated between ending
inventory and cost of goods sold.
Under a periodic inventory system, the allocation
is made at the end of the accounting period.1 The costs assignable to the ending inventory are
determined.
2 The cost of the ending inventory is subtracted
from the cost of goods available for sale todetermine the cost of goods sold.
3 Cost of goods sold is then deducted from sales
revenues in accordance with the matching
principle.
-
8/2/2019 Periodic (1)
24/54
Inventory Costing
Specific Identification method
Assumed Cost Flow methods
FIFO- First-in, First-Out- earliest goodspurchased first to be sold
LIFO- Last-in,First-Out- latest goods
purchased the first to be sold
Average Cost Method- costs are charged on
the basis of weighted average unit cost
-
8/2/2019 Periodic (1)
25/54
Step 1 Step 2
Ending Inventory Cost of Goods SoldUnit Total
Date Units Cost Cost
11/27 400 $ 13 $ 5,200 Cost of goods available for sale $ 12,00008/24 50 12 600 Less: Ending inventory 5,800
450 Cost of goods sold
ALLOCATION OF COSTS- FIFO METHOD
Pool of Costs
Cost of Goods Available for Sale
Unit TotalDate Explanation Units Cost Cost
01/01 Beginning inventory 100 $10 $ 1,000
04/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200
Total 1,000 $ 12,000
$ 5,800 $ 6,200
-
8/2/2019 Periodic (1)
26/54
100 $ 10 $ 1,000200 11 2,200
250 12 3,000
550 $ 6,200
PROOF OF COST OF GOODS SOLD
The accuracy of the cost of goods soldcan be verified by recognizing that thefirst units acquired are the first units sold.
Unit TotalDate Units Cost Cost
01/01 X =04/15 X =08/24 X =
Total
-
8/2/2019 Periodic (1)
27/54
Step 1 Step 2
Ending Inventory Cost of Goods Sold
Unit TotalDate Units Cost Cost
01/01 100 $ 10 $ 1,00004/15 200 11 2,200 Cost of goods available for sale $ 12,00008/24 150 12 1,800 Less: Ending inventory 5,000
450 Cost of goods sold
ALLOCATION OF COSTS- LIFO METHOD
Pool of Costs
Cost of Goods Available for Sale
Unit TotalDate Explanation Units Cost Cost
01/01 Beginning inventory 100 $10 $ 1,00004/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200
Total 1,000
$ 12,000
$ 5,000 $ 7,000
-
8/2/2019 Periodic (1)
28/54
PROOF OF COST OF GOODS SOLD
The cost of the last goods in are the first to be assignedto cost of goods sold. Under a periodic inventorysystem, all goods purchased during the period are
assumed to be available for the first sale, regardless ofthe date of purchase.
Unit Total
Date Units Cost Cost11/27 X =
X =08/24
Total
400 $ 13 $ 5,200150 12 1,800
550 $ 7,000
-
8/2/2019 Periodic (1)
29/54
The average cost method assumes thatgoods available for sale are homogeneous.
The allocation of the cost of goods
available for sale is made on the basis of
the weighted average unit cost incurred.
-
8/2/2019 Periodic (1)
30/54
The average cost method assumes that
goods available for sale arehomogeneous.
-
8/2/2019 Periodic (1)
31/54
Step 1 Step 2
Ending Inventory Cost of Goods Sold
$ 12,000 1,000 = $12.00Unit Total Cost of goods available for sale $ 12,000
Units Cost Cost Less: Ending inventory 5,400
450 x $ 12.00 = Cost of goods sold
ALLOCATION OF COSTS -AVERAGE COST METHOD
Pool of Costs
Cost of Goods Available for Sale
Unit TotalDate Explanation Units Cost Cost
01/01 Beginning inventory 100 $10 $ 1,000
04/15 Purchase 200 11 2,20008/24 Purchase 300 12 3,60011/27 Purchase 400 13 5,200
Total 1,000 $ 12,000
$ 5,400 $ 6,600
-
8/2/2019 Periodic (1)
32/54
Factors Used in Selecting an
Inventory Cost Method
Income statement effects
Balance sheet effects
Tax Effects
-
8/2/2019 Periodic (1)
33/54
Income Statement Effects
In periods ofincreasing prices
FIFO reports the highest net income
LIFO the lowestaverage cost falls in the middle.
In periods ofdecreasing prices
FIFO will report the lowest net income
LIFO the highest
average cost in the middle.
-
8/2/2019 Periodic (1)
34/54
Balance Sheet Effects
In a period ofincreasing prices costs
allocated to ending inventory using:
FIFO will approximate current costs
LIFO will be understated
-
8/2/2019 Periodic (1)
35/54
Why Do Companies Use
Lifo?
Higher cost of goods sold
Lower net income
Lower Income Taxes
-
8/2/2019 Periodic (1)
36/54
Cost-of-Goods-Sold Model
Budgeted Cost of Goods Sold
Budgeted Ending Inventory+
=
Actual Beginning Inventory
= Purchases
Budgeted Cost of Goods Available for Sale
-
8/2/2019 Periodic (1)
37/54
Cost of Goods Sold under a
periodic
Beginning
Inventory
$100,000
Net
Purchases
$560,000
Cost of GoodsAvailable for
Sale $660,000
+ =
EndingInventory
$120,000
=Cost of Goods
Sold
$540,000
-
8/2/2019 Periodic (1)
38/54
Accounts Payable
Inventory
120,000Ending
Balance
Purchases
560,000
Purchases
100,000Beginning
Balance
Cost of Goods Sold
100,000560,000
540,000
120,000EndingBalance
560,000
Purchases
560,000
Purchases
100,000Beginning
Balance
Periodic System
-
8/2/2019 Periodic (1)
39/54
January 8 20 units @ $20 = $ 400
May 19 55 units @ $30 = $1,650October 23 25 units @ $31 = $ 775
Total units 100
Units sold 70Units left 30
Units Purchased in 20xx
-
8/2/2019 Periodic (1)
40/54
Units sold by date:
Jan 5 17May 19 33
Oct 23 20
Total sales 70
30 units left in inventory
Units Sold and in
Ending Inventory
-
8/2/2019 Periodic (1)
41/54
Cost of Goods SoldOct 23 $ 620
May 19 990
Jan 5 340Total $1,950
Specific Identification
20 Units @ $31
5 Units @ $31
33 Units @ $30
22 Units @ $3017 Units @ $20
3 Units @ $20
-
8/2/2019 Periodic (1)
42/54
Ending InventoryOct 23 $155
May 660
Jan 60Total $875
Specific Identification
20 Units @ $31
5 Units @ $31
33 Units @ $30
22 Units @ $3017 Units @ $20
3 Units @ $20
-
8/2/2019 Periodic (1)
43/54
Weighted Average
25 Units @ $31 (Oct)
55 Units @ $30 (May)
20 Units @ $20 (Jan)
= $ 775
= 1,650
= 400= $2,825 Total Cost100 Total Units
-
8/2/2019 Periodic (1)
44/54
Weighted Average
$2,825 total cost/100 units = $28.25/unit
Cost of goods sold = 70 $28.25 = $1977.50
Ending inventory = 30 $28.25 = $847.50
-
8/2/2019 Periodic (1)
45/54
Cost of Goods SoldJan $ 400
May 1,500
Total $1,900
First-In, First-Out
25 Units @ $31 (Oct)
5 Units @ $30 (May)
50 Units @ $30
20 Units @ $20 (Jan)
-
8/2/2019 Periodic (1)
46/54
Ending InventoryOct $775
May 150
Total $925
First-In, First-Out
25 Units @ $31 (Oct)
5 Units @ $30 (May)
50 Units @ $30
20 Units @ $20 (Jan)
-
8/2/2019 Periodic (1)
47/54
Cost of Goods SoldOct $ 775
May 1,350
Total $2,125
Last-In, First-Out
25 Units @ $31 (Oct)
45 Units @ $30 (May)
10 Units @ $30
20 Units @ $20 (Jan)
-
8/2/2019 Periodic (1)
48/54
Ending InventoryOct $300
May 400
Total $700
Last-In, First-Out
25 Units @ $31 (Oct)
45 Units @ $30 (May)
10 Units @ $30
20 Units @ $20 (Jan)
-
8/2/2019 Periodic (1)
49/54
EndingInventorySpecific identification $875.00
FIFO $925.00
LIFO $700.00Weighted-average $847.50
Comparison of Methods
-
8/2/2019 Periodic (1)
50/54
Cost of Goods SoldSpecific identification $1,965.00
FIFO $1,900.00
LIFO $2,125.00Weighted-average $1,977.50
Comparison of Methods
-
8/2/2019 Periodic (1)
51/54
When prices are rising LIFO produces
the lowest income and lowest income tax.
Comparison of Methods
Gross Margin from Sales:
Specific identification $1,035.00
FIFO $1,100.00
LIFO $ 875.00
Weighted-average $1,022.50
-
8/2/2019 Periodic (1)
52/54
The Income Tax
Advantage of LIFO
During periods of inflation, LIFOs income
is the lowest.
The most attractive feature of LIFO isreduced income tax payments.
-
8/2/2019 Periodic (1)
53/54
-
8/2/2019 Periodic (1)
54/54