Inventories and Cost of Goods Calculations

Chapter 9
Inventories and Cost of

Goods Calculations
9-1 Comparison of Journal Entries under
Perpetual and Periodic Inventory Systems
Transaction Perpetual Inventory System Periodic Inventory System
July 5 Purchase of Merchandise Inventory 40,000 Purchases 40,000
merchandise on Accounts Payable 40,000 Accounts Payable 40,000
credit.
July 6 Purchase returns and Accounts Payable 2,000 Accounts Payable 2,000
allowances. Merchandise Inventory 2,000 Purchase Returns and 2,000
Allowances
July 8 Freight costs on Merchandise Inventory 200 Freight-in 200
purchases. Accounts Payable 200 Accounts Payable 200
July 14 Payment on account Accounts Payable 38,000 Accounts Payable 38,000
with a discount. Cash 37,240 Cash 37,240
Merchandise Inventory 760 Purchase Discounts 760
July 16 Sale of merchandise Accounts Receivable 24,000 Accounts Receivable 24,000

on credit. Sales Revenue 24,000 Sales Revenue 24,000
Cost of Goods Sold 12,000 No entry

Merchandise Inventory 12,000
July 18 Return on Sales Returns and Allowances 1,000 Sales Returns and Allowances 1,000
merchandise. Accounts Receivable 1,000 Accounts Receivable 1,000
Merchandise Inventory 500 No entry

Cost of Goods Sold 500
July 25 Cash received on Cash 22,770 Cash 22,770
account with a Sales Discounts 230 Sales Discounts 230
discount. Accounts Receivable 23,000 Accounts Receivable 23,000
9-2 Cost of Goods Sold
CALCULATION OF COST OF GOODS PURCHASED
Purchases $36,000
Less: Purchase returns and allowances $7,000
Purchase discounts 3,000 10,000
Net purchases 350,000
Add: Freight-in 5,000
Cost of goods purchased $355,000
CALCULATION OF COST OF GOODS SOLD
Inventory, January 1 $40,000

Cost of goods purchased 355,000
Cost of goods available for sale 395,000
Inventory, December 31 50,000
Cost of goods sold $345,000
9-3 Components of the Income Statement
using the Periodic Inventory System
Sales
Net Sales
- Sales returns and allowances
- Cost of goods sold
- Sales discounts Gross
= Gross profit
Net Sales = Net Sales Profit
Purchases Selling expenses (including freight-out)

- Purchase returns and + Administrative expenses
allowances Operating
= Total operating expenses
- Purchase discounts Expenses
= Net purchases
+ Freight-in
Gross profit
= Cost of goods purchased
- Total operating expenses
Net
= Net income
Beginning Inventory Income
+ Cost of goods purchase
= Cost of goods available for sale
- Ending inventory
Cost of
Goods = Cost of goods sold
Sold
9-4 Costing Ending Inventory using FIFO,
LIFO and Average Cost Methods Periodic
System
Your company provided the following data for the year:
Units Unit Cost Total Cost

January 1 80 $15.00 $1,200
March 15 purchase 60 16.00 960
June 20 purchase 100 17.50 1750
October 25 purchase 90 18.00 1,620
Units and goods available 330 $5,530
Ending inventory (December 31) consists of 110 units.

Complete the costing of ending inventory under FIFO, LIFO, and average cost.
9-4 Costing Ending Inventory using FIFO,
LIFO and Average Cost Methods Periodic
System (continued)
FIFO LIFO AVERAGE
Cost of goods available for sale . $5,530 $5,530 $5,530
LESS: Ending Inventory (FIFO)
Dates: Units X Cost
October 25 (90 X $18,000) =
$1,620
June 20 (20 X $17.50) = 350 1,970
Balance
LESS: Ending Inventory (LIFO)
Sheet
Dates: Units X Cost Effects
Jan 1 (80 X $15.00) = $1,200
Mar 15 (30 X $16.00) = 480 1,680
LESS: Ending Inventory (Aver. Cost)
Wt. Aver. Cost + Units = Unit Cost
$5,530 + 330 = $16.76 (r)
$16.76/unit X 110 units 1,844 (r)
Cost of Goods Sold . $3,560 $3,850 $3,686
9-5 Effects of Inventory Errors
Inventory Error Cost of Goods Sold Net Income

Beginning inventory understated Understated Overstated
Beginning inventory overstated Overstated Understated
Ending inventory understated Overstated Understated
Ending inventory overstated Understated Overstated
SELF-CORRECTING ERRORS OVER TWO PERIODS
Current Period Next Period
becomes
Ending Inventory Error Beginning Inventory Error
An errors effect on offsets Reverse effect on net

income this period income in this period
CORRECT TOTAL INCOME OVER TWO PERIODS

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Chapter 9

Inventories and Cost of

July 16 Sale of merchandise Accounts Receivable 24,000 Accounts Receivable 24,000

Cost of Goods Sold 12,000 No entry

Merchandise Inventory 500 No entry

CALCULATION OF COST OF GOODS SOLD

Inventory, January 1 $40,000

Purchases Selling expenses (including freight-out)

Units Unit Cost Total Cost

Ending inventory (December 31) consists of 110 units.

Inventory Error Cost of Goods Sold Net Income

SELF-CORRECTING ERRORS OVER TWO PERIODS

Current Period Next Period

An errors effect on offsets Reverse effect on net

CORRECT TOTAL INCOME OVER TWO PERIODS

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