Method Periodic for Inventory By Joel E. Thompson I. Basic Points (also apply to perpetual method) A. Definition - inventories are goods held for sale to customers and incomplete goods, materials, and supplies to be used in producing goods for sale. B. Classification - inventories are a current asset (part of operating cycle). C. Ownership of inventories - sale or purchase of inventory usually occurs when legal title passes. This usually occurs when the seller completes physical delivery of the goods. 1. FOB Shipping Point - title passes when the goods are shipped (when goods are placed on the truck). 2. FOB Destination Point - title passes when the goods are received (when the goods are taken off of the truck). D. Valuation - all necessary costs incurred in getting an item ready to sell are included in the value of the inventory item (e.g., purchase price, freight-in, handling, storage).
II. Annual count of inventory at year-end. This determines A. Merchandise inventory for balance sheet; B. Cost of goods sold since: Beginning inventory Plus cost of goods purchased Less ending inventory Equals cost of goods sold Also note: Beginning inventory Plus cost of goods purchased Equals cost of goods available for sale
III. Cost of goods sold in detail for income statement Net sales Cost of goods sold: Inventory, Jan. 1, Purchases 20XX Less: Purchase returns and allowances Purchase discounts Net purchases Freight-in Cost of goods purchased XX XX XX XX XX (XX) XX XX XX
Cost of goods available for sale Less: Inventory, Dec. 31, 20XX Cost of goods sold Gross profit
XX (XX) (XX) XX
IV. Purchasing and paying for merchandise - Entries (Periodic method) Example: UP Rec buys 10 air hockey tables from Halex at $80 each. Terms are 2/10, n/30, FOB shipping point. Transportation costs are $50. Required: Give the general journal entries for the following: A. To record purchase of the tables. B. One of the tables is defective and is returned to Halex. C. Up Rec notices that the tables are the wrong model, but agrees to keep them in exchange for a $10 reduction in price per table. D. Up Rec pays for the tables within 10 days and receives a 2% discount. E. If Up Rec had not paid within 10 days, but pays within 30 days. F. Up Rec paid the shipping bill for the tables. V. Selling and collecting cash for merchandise - entries for the periodic method are the same as the perpetual method except that cost of merchandise sold is not recorded at the time of each sale. VI. Cost of goods sold can be recorded as an adjusting or closing entry. Example: UP Rec Required: Give the closing entry to record cost of merchandise sold. Solution: See class notes.