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Chapters_5___6 - Accounting for Merchandising Businesses...

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Unformatted text preview: Accounting for Merchandising Businesses and Inventory Chapter 5 & 6 1 Merchandising Business Purchases merchandise and then resells it As contrasted with a: Service business Manufacturing business 2 Accounting for a Merchandising Business Involves an Inventory account (an asset) and Cost of Goods Sold (CGS) (an expense) A different Income Statement format 3 Types of Inventory Systems Perpetual Inventory System Periodic Inventory System Both systems are GAAP (as long as the system chosen is consistently applied) 4 Perpetual Inventory System page 1 An accounting system that constantly tracks the value of each inventory item on hand and the value of CGS Therefore, an accounting entry is needed every time inventory is purchased and sold 5 Perpetual Inventory System page 2 Historically, only used by business with few inventory purchases and sales and an easy way to track the merchandise (such as jewelers or auto dealers) However, powerful computer systems have made this system possible for other businesses 6 Periodic Inventory System page 1 An accounting system that only values inventory and CGS periodically (i.e., by a physical inventory count 7 Periodic Inventory System page 2 Formula: Beginning Inventory + Purchases = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold 8 Accounting for Inventory page 1 A major accounting issue arises when identical units of merchandise are acquired at different unit costs during a period Inventory cost flow assumptions are necessary 9 Inventory Cost Flow Assumptions: FIFO = First-In, First-Out LIFO = Last-In, First-Out WAC = Weighted-Average Cost All systems are GAAP (as long at the chosen assumption is consistently applied) 10 FIFO The earliest inventory purchases are allocated to CGS and the later purchases value ending inventory 11 LIFO The last inventory purchases are allocated to CGS and the earlier purchases value ending inventory Does the system make sense? Why or why not? 12 Weighted Average Cost FIFO and LIFO give the extreme (highest or lowest) value for ending inventory and CGS WAC gives an "in-between" value for both ending inventory and CGS Cost of Goods Available for Sale (in $) Cost of Goods Available for Sale (in Units) 13 Which cost-flow assumption is most often chosen? Why? 14 LIFO is the most-often chosen system. Normally, there is inflation (as opposed to deflation) in prices. LIFO allocates the later purchases to CGS. Thus, CGS (an expense) will have the highest value under LIFO. Net Income will then be lower under LIFO. Therefore, Income Taxes will be lowest under LIFO 15 ...
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