Figure 6-l. 1. The cost of the beginning merchandise inventory. 2. The cost of the net purchases added to the inventory during the fiscal period.

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1 Figure 6-l Merchandise is continually being purchased and sold. A business' actual merchandise inventory changes from day to day. The flow of inventory costs through the records of a business is shown in Figure 6-1. The cost of the merchandise available for sale consists of: 1. The cost of the beginning merchandise inventory. 2. The cost of the net purchases added to the inventory during the fiscal period. At the end of each fiscal period, the cost of the merchandise available for sale is divided into: 1. 2, The cost of the ending merchandise inventory. The ending merchandise inventory represents a current asset that will be charged as costs infuture fiscal periods. The cost of the merchandise sold during the current fiscal period. This cost materially affects the amount of net income reported fo the fiscal period. (CONCEPT: Adequate Disclosure) The cost of both beginning and ending merchandise inventory affects items on an income statement, a statement of stockholders' equity, and a balance sheet. The effects are shown in Figure 6-2. An accurate merchandise inventory cost must be determined to adequately report the financial progress and condition of a merchandising business. GONCEPT: Adequate Disclosure) If the ending inventory is understated, the cost of merchandise sold will be overstated. Consequently, the net income will be understated. As a result, total assets and total stockholders' equity will be understated. If the ending inventory is overstated, the reverse will be true, and additional income tax must be paid on the overstated income. In neither situation will financial statements report accurate information. (CONCEPT: Adequate Disclosure) Reports and ltems Affected Income Cost of Gross Profit.. Net lncome., Statement of Netlncome.,..' Retained Stockholders' Merchandiselnventory....: Total Assets. Stockholders' Equity.. Figure 6-2 lf Ending lnventory is Understbted Understated U nderstated r, Understated.,,, ' 168 CHAPTER 6 Inventory Plannine and Valuatron

2 Items in the merchandise inventory of a merchandising business are frequently referred to as goods. Typically, a business counts as part of its inventory all goods that it legally owns. The cost of these goods includes: 1,. The price paid to vendors for the merchandise. This price includes the purchase invoice amount less discounts, returns, and allowances granted by the vendors. 2. The cost involved in getting the goods to the place of business and ready for sale. This cost includes transportation charges paid by the buyer. Merchandising businesses must know both the cost of the goods and the number of goods in inventory. Businesses use two methods to determine the number of goods in inventory: 1,. Taking a physical count of the individual items in inventory. All goods in inventory as of a given date are included in a physical inventory count. 2. Keeping a continuous record for each merchandise item showing the number purchased and the number sold. Using this method, a business can determine the number of goods in inventory at any point in time. Goods in Tronsit Merchandising businesses purchase goods from suppliers. The suppliers ship the goods to the businesses. For goods in transit at the time of a physical count of inventory, the business must determine who holds title to the goods. When title to goods in transit passes from the supplier to the buyer, the goods become part of the buyer's inventory regardless of where they are physically located. A vendor's terms of sale may include the provision FOB shipping point. FOB is an abbreviation for the phrase Free On Board. FOB shipping point means that the buyer pays the transportation charges. Under FOB shipping point terms, the title to the goods passes to the buyer as soon as the vendor delivers the goods to a transportation business. These goods in transit, but not yet received by the buyer, are part of the buyer's inventory. If the terms of sale are FOB destination, the vendor pays the transportation charges. Title to the goods passes to the buyer when the buyer receives the goods. These goods in transit, but not yet received by the buyer, are part of the aendor's inventory. The buyer does not include these goods in the cost of inventory. Goods on Consignmenl Goods that are given to a business to sell but for which title remains with the vendor, are called a consignment. The person or business that receives goods on consignment is called the consignee. The person or business that gives goods on consignment is called the consignor. The consignee agrees to receive, care for, and attempt to sell the consigned goods. If the goods are sold, the consignee deducts a commission from the sale amount and sends the remainder to the consignor. In a consignment, title to the goods does not pass to the consignee. The goods on consignment are part of the consignor's inventory. The consignee does not include consigned goods in the cost of its inventory. A consignee agrees to care for the goods on consignment and to make adequate attempts to sell them. Therefore, a consignee has implied liabilities if anything should happen to the goods before they are sold. A consignee often reports the cost of consigned goods as an attachment or footnote to its balance sheet. t---- r------r----lfu 4El l Inuentorn managetnertt consists of determini ng tbe qu(rtrtit-v o.l'gctc,ds on band and cleueloping I I proceclures.for ordering, receiuittg, and maitt- l 'ij luitting lhe inu(nlurv. L--- n ll tf I C.IAPTEI{ 6 Inventory Planning and Valuation 169

3 l. Record the description informqtion. 4. Enter oll purchose tronsoctions. STOCK RECORD Description 31/2" Computer Diskettes (boxes) 51o.;. 51o. F'lo6 Reorder 7,OOO 111n;rrr 3oo Locotion Bin 26 INCREASES PURCHASE INVOICE NO. 2. Write the beginning quontiiy. 3. Record oll soles Oct. 31 Figure 6-3 A continuous record of merchandise inventory increases, decreases, and balance on hand is known as a perpetual inventory. OfficeMart, Inc., sells office furniture, equipment, and supplies. It maintains a perpetual inventory. A perpetual inventory provides day-to-day records about the quantity of merchandise on hand. Based on the records, management knows when an item of inventory is low and needs to be reordered. For each inventory item, the record shows the number on hand, the number purchased, and the number sold. A form used to show the type of merchandise, quantity received, quantity sold, and balance on hand is called a stock record. A file of stock records for all merchandise on hand is called a stock ledger. OfficeMart's stock record for the diskettes is shown in Figure 6-3.It includes a notation of the minimum balance at which a reorder is to be placed. For example, OfficeMart determines that two weeks are required to order and to receive a shipment of boxes of 31/2" diskettes from a vendor. In a two-week period, OfficeMart will sell an average of 300 boxes of diskettes. Therefore, OfficeMart reorders diskettes when the inventory reaches 300 boxes, or units. Each reorder is for 1,000 units. On February 21, the inventory balance falls below the reorder point. An order is immediately placed for 1,000 boxes. The order is received on March 7. A completed form authorizing a seller to deliver goods with payment to be made later is called a purchase order. OfficeMart prepares purchase orders for all purchases. During the year, sales are recorded on the stock record when the sale is made. Purchases are recorded on the stock record when the goods are received. Unit prices are not recorded on the stock records. They are obtained from copies of the purchase invoices. o f E P g : : i... M<rintqining o stock record l. Record the description of the inventory item, 3- I /2" Computer Diskettes (boxesl, the stock number, F106, the reorder quontity, 1,000, the minimum number, 300, ond the worehouse locotion, Bin Write the beginning quontity. On Jon. I, 20--, the quontity on hond wos Record qll soles tronsoctions in ihe Decreoses columns of the stock record. After eoch sole, enter the new quontity in column 7. For the sole on Jonuory, 6, write Jan. I6 in column 4, the soles invoice number, l76l, in column 5, ond the quontity sold, 120, in column 6. In column 7, record the new bolonce of inventory, Enter oll purchose tronsociions in the Increoses columns of the stock record when the goods ore received. Enter the dote, purchose invoice number, quontity, ond bolonce. l70 Cl laptelt (r Inventory Planning and Valuation

4 l. Enter invenlory dote ond item description. October 31",20-- INVENTORY RECORD Removable 3. Write the number 4. Record the unit of units on hond. 5. Colculote ond record the tobl item cost. 2. Record stock numbers ond descriptions. Figure 6-4 3,149.OO 306.OO 6. Totol the column. A merchandise inventory determined by counting, weighing, or measuring items of merchandise on hand is known as a periodic inventory. Counting, weighing, or measuring merchandise on hand for a periodic inventory is commonly referred to as "taking an inventory." For businesses with a large quantity of merchandise on hand, taking an inventory count is expensive. Therefore, businesses usually take a periodic inventory only once each fiscal period. When only a periodic inventory is used, the low quantity of a merchandise item can be overlooked. When this happens, the business may not have the merchandise when customers want it. For this reason, OfficeMart uses the perpetual inventory method. Errors can occut however, even when the perpetual inventory method is used. Therefore, OfficeMart takes a periodic inventory once each year to check the accuracy of the perpetual inventory. A form used during a periodic inventory to record information about each item of merchandise on hand is called an inventory record. One inventory record is used for each item or category of items in inventory. \tvhen taking an inventory, OfficeMart uses an inventory record for categories of merchandise as shown in Figure 6-4. The periodic inventory count is compared to the perpetual inventory.any differences are adjusted on the stock records. In the case of stock item F106, the physical count of boxes of the 3-1/2" diskettes matched the quantity listed on the stock record. Therefore, no adjustment was needed. If large differences are found, the business should review its recording and control procedures to ensure that the inventory and the inventory records are being properly maintained. Iil Comolene rhe invenlorv record l. Enter the dote of the periodic inventory, October 31,20-', ond the item description, Removoble Computer f : Sforoge (boxes). F 2. Record the stock number, F106, ond description, 3 l/2"'diskettes. D 3. Write the octuol number of units onhond, 670., e. Record the unit price,4.70. The unit price doto ore obtoined from purchose invoices. In this cose, oll3-t/z' I diskettes in inventory were purchosei ot the some price. Additionol lines of the record ore used to record i units purchosed ot o different unit price. i S. Colculote ond record the totol cost, 3, Totol cost for eoch item is colculoted by multiplying the unit i or'.e, column 4, by the number of items on hond, column Determine the totol cost for these inventory items, 24, The totol of oll inventory records is the totol cosl CHAPTER 5 Inventory Planning andvaluation 17l

5 nns l:rtflrt consignment consignee consignor stock record stock ledger purchase order inventory record l-1\ul-rlt tuu:t l_-j UJl,i,'ri lj\jlll ij t t. What two elements are included in the cost of merchandise available for sale? 2. If ending merchandise inventory is understated, will the net income be overstated or understated? 3. Name two ways to determine the number of inventory items on hand. olk toolfltrl Completing o stock record for o perpetuol inventory system A stock record form and an inveutrlry recorcl form for Tcrwer Television are provided in the Working Pnytars. Yclur instructor will guide you thmugh the folkrwing examples. 4. Fill in the top portiot-t of thc stock recorcl form with tl-re folkrwing; infclrmation: Description, 19" color television seu Stock No., K087; I{eorder, B0; Minimutn,20; ancl Location, Bin Recorcl the following infornration. Save your work to complete the On Your Own below. Dote Purchose Invoice No. Soles Invoice No. Quontity Bolonce Sept. I 62 Sept Sept B Sept.lT 183 B0 Sept I 5 Ot;*' Completing o stock record for o perpetuol inventory system ond comporing it to on inventory record Use the working papers from tl-re Work Together above. Work independently to complete the following problem. 6. Record the remaining information for product number K0BZ on the stock record. Dote Purchose Invoice No. Soles Invoice No. Quontity Bolonce Sept Sept Sept B0 Sept.3O Compare the ending balance in units from the stock record with the number of units on hand for product K0BZ in the inventory record. Make sure they are equal. 172 (-HAl'1 I li (r Inventory Planning and Valuation