Week 4 Lecture - Week 4 Lecture Inventory Inventory and...

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Week 4 Lecture: Inventory Inventory and Gross Profit | Perpetual vs Periodic Systems | Inventory Costing | Lower of Cost or Market | Inventory and Accounting Principles Inventory and Gross Profit A business that buys goods and resells them to customers is called a merchandiser . Inventory is a current asset account that represents goods purchased that are available for resale to customers. For a merchandiser, inventory is a large and very valuable asset. Think of the cash that a company like Walmart has in its inventory. Recording transactions and tracking inventory are important parts of the financial information for this type of company. When inventory is purchased, it is recorded as an asset, since it is something owned and has future value. The balance in the inventory account is shown on the balances sheet. When inventory is sold, it is removed from the asset account and recorded as Cost of Goods Sold, a type of expense account. The amount of cost of goods sold for the period is listed on the Income Statement, where it is subtracted from sales (revenues). Sales are recorded at the selling price whereas inventory and cost of goods sold are recorded at the cost of purchasing the goods from the manufacturer. The difference between the sale (revenue) and the cost is gross profit. Sales minus cost of goods sold equal gross profit. Gross profit is often evaluated as ratio to sales, referred to as the gross profit percentage. Although dollar values may vary, the ratio between sales, cost of goods sold, and gross profit should be relatively stable. This ratio is watched closely by management, since changes can rapidly reduce profits significantly. In a merchandiser’s income statement, other expenses are subtracted from gross profit to determine net income. This format for the income statement provides more useful information to management and other users of the financial statements. Please review the video clip below for more information: Video Clips Cost Of Goods Sold Perpetual vs. Periodic Systems There are two systems for recording inventory transaction: the Perpetual and the Periodic systems. Use of one system over the other may be a choice, or it may be out of necessity due to resources. The perpetual system involves recording each business transaction that affects the inventory account being recorded at the time of the transaction. When inventory is purchased, returned to the vendor, sold, or returned from the buyer, the transaction is recorded immediately. This results in a running accurate balance in the inventory account at all times.
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