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Sept 18 - ORIE 3150 Notes Merchandise Inventory This...

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ORIE 3150 September 18, 2008 Notes Merchandise Inventory This chapter discusses merchandise inventory carried by merchandising wholesalers and retailers. We will deal with the more complicated case of inventory in a manufacturing company later. A. Merchandise inventory is a current asset. B. The matching principle is applied to inventory valuation. 1. The higher the value placed on ending inventory, the lower the cost of goods sold and the higher the gross profit and net income. Recall: Beginning inventory + Purchases (including freight-in expense) - Ending inventory Cost of goods sold. Net sales - Cost of goods sold - Total operating expense Net income D. It is important to manage inventory levels, taking into consideration both the costs of handling, storage, and financing inventories and the cost of lost sales. Inventory levels are minimized on a just-in-time operating environment. JIT = Just-in-time There is also the ATL system, which is similar. ATL = “always too late”
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E. Inventory cost includes purchase price less discounts, freight-in and insurance, and taxes and tariffs. F. Goods flow can be different from the flow of costs. For example, every beer distributor will try to sell the oldest beer first, before it expires. Rotating inventory is a major part of the beer distributor’s job. G. Cost flow is an assumption made about costs for accounting purposes. H. There are two inventory systems, periodic and perpetual. 1. In the periodic system, no detailed records of the actual inventory on hand are maintained during the period. We start the period with an accurate beginning merchandise inventory. Then we record the net cost of all purchases of merchandise during the period. The sum of these two figures is the goods available for sale.
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