The products that manufacturing and wholesale

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Financial Accounting: The Impact on Decision Makers
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Chapter 8 / Exercise 01
Financial Accounting: The Impact on Decision Makers
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The products that manufacturing and wholesale businesses supply to retailers become the retailer's inventory. Inventory refers to the goods that the retailer owns and has available to sell toits customers as part of normal business operations. It is sometimes referred to as merchandise inventory and is usually a retailer's largest current asset as well as the center of merchandising transactions. Businesses that have inventory must track how much it costs them by using either the periodic or perpetual inventory system. See Exhibit 5-1 from page 278 to view the inventory process.Perpetual vs. Periodic Inventory Systems
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Financial Accounting: The Impact on Decision Makers
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Chapter 8 / Exercise 01
Financial Accounting: The Impact on Decision Makers
Norton/Porter
Expert Verified
Companies use either the perpetual or periodic inventory system to track how much they have available to sell and how much they have sold. The perpetual system is more detail oriented than the periodic system because it is computerized. Inventory records are updated every time a bar code is scanned. The periodic system, on the other hand, relies on the result of a physical inventory count to update the inventory records at the end of an accounting period.In this lesson, you will concentrate on the perpetual inventory system as it is the most widely used. A modern perpetual inventory system records the units purchased, the units sold, and the quantity of inventory on hand. In addition, the system reorders inventory when it goes below a certain point and is integrated with accounts receivable and sales.Journalizing Transactions for the Purchase and Sale of InventoryIn the section of the textbook discussing the purchase of inventory, pay attention to the information given about cash and credit purchases of goods, purchase discounts, and purchase returns and allowances. In the section discussing the sale of inventory, pay attention to the information given on cash and credit sales, sales discounts and sales returns, and allowances. These details make a huge difference in the accounting of these transactions. Journalizing Shipment Transactions and Other Selling ExpensesWhen you purchase something online or from a catalog, you normally have to pay shipping and handling charges that increase the cost of the item you purchased. This same situation occurs for retailers who buy merchandise from suppliers or deliver goods to customers. These shipping costs and other selling expenses are explained and illustrated on pages 286-287 and include the following:The cost to receive goods from suppliersThe cost to deliver goods to customersThe cost of advertising and selling goodsPreparing a Retailer's Financial StatementsThe accounting cycle for a merchandising business involves the same steps as a service business.However, businesses that use a perpetual inventory system require an additional adjusting entry to make their computerized records agree with the actual inventory on hand. To do this requires aphysical count at the end of each accounting period. You may wonder why. Well, sometimes inventory is stolen, recording errors are made, or goods are damaged. See Exhibit 5-2 from page 279 for an example.

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