Chapter 8

1. Chapter 8 Expenditure and Inventory Process

2. Bellringer: • What are the 4 Activities in the Expenditure Process?

3. Essential Questions: • How do companies keep track of their inventories they sell? • How do companies record the cost of their inventories?

4. Enduring Understandings: • A company must have an information system that captures data needed to report the effects of accounting events and to provide information to management • Why? To plan and control the activities of a business.

5. Enduring Understandings: • Whether you use a Perpetual or Period Inventory System to track your inventory……. • Whether you use the Gross Method or Net Price Method to record your inventory……. • The of inventory is the VALUE SAME

6. Objectives: • Describe the difference through comparing and contrasting between the periodic and perpetual inventory systems. • Calculate and record inventory activities using each system. • Discuss the difference between the net price and gross price methods for recording inventory. • Calculate and record inventories using each method (gross vs. net)

7. Bellringer: • Which of the following expenditure process activities are considered an accounting event? • Determine the need for goods and services • Select suppliers and Order goods/services • Receive goods/services • Pay suppliers of goods/services

8. Merchandising Vs. Manufacturing ? • Inventory purchased to be resold – BUY • The Account for Inventory is called, “Merchandise Inventory” OR “Inventory” • Ex. Clothes • Inventory purchased to be used to MAKE products • The Account for Inventory is called, • “Direct Materials Inventory” • Ex. IPhone – plastic cases • “Or Purchases” • glue

9. Decision # 1 - How do companies keep track of their inventories they sell? PERPETUAL • Determine cost of goods sold and ending inventory on a continuous basis • “Running Balance” • Typically MORE expensive items • Ex. Cars, Jewelry, Computers PERIODIC • Determine ending inventory and cost of goods sold at the end of the period • Specific points in time • Typically LESS expensive items • EX. – Grocery stores, Dollar store items

10. Decision # 1 - How do companies keep track of their inventories they sell? PERPETUAL • Purchases – • “Inventory Account” • Returns and Allowances • “Inventory Account” • Freight (or insurance) • “Inventory Account” • Discounts of • “Inventory Account” PERIODIC • Purchases- • “Purchases Account” • Returns and Allowances • “Purchases and Returns Account” • Freight (or insurance) • “Freight-in” or Insurance” • Discounts of • “Purchase Discounts”

11. Decision # 2 - How do companies record the cost of their inventories?ABC Company buys $9,000 of inventory with terms 2/10, n/30 PERPETUAL Dr. Inventory $9,000 Cr. Acct. Payable $9,000 Inventory $9,000 PERIODIC Dr. Purchases $9,000 Cr. Acct. Payable $9,000 Purchases $9,000

12. Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain the inventory PERPETUAL Dr. Inventory $200 Cr. Acct. Payable $200 Inventory $9,000 $200 PERIODIC Dr. Freight-in 200 Cr. Cash $200 PurchasesFreight-in $9,000 $200

13. Decision # 2 - How do companies record the cost of their inventories?ABC returns $800 of inventory because it is the wrong order PERPETUAL Dr. Acct. Payable $800 Cr. Inventory $800 Inventory $9,000 $800 $200 PERIODIC Dr. Acct. Payable $800 Cr. Purchase returns and allowances $800 Purchases Freight – in $9,000 $200 Purchase Returns and Allowances $800

14. Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory PERPETUAL Dr. Acct. Payable $8,200 Cr. Cash $8,200 Accounts Payable $800 $9,000 $8,200 $8,200 $0.00 PERIODIC Dr. Acct. Payable $8,200 Cr. Cash $8,200 Accounts Payable $800 $9,000 $8,200 $8,200 $0.00

15. With a perpetual system all events that affect the inventory are recorded as increases or decreases to: • Purchases Account • Inventory Account • Separate temporary accounts depending on transaction: Purchases, Returns and Allowances, Freight

16. With a periodic system all events that affect the inventory are recorded as increases or decreases to: • Purchases Account • Inventory Account • Separate temporary accounts depending on transaction: Purchases, Returns and Allowances, Freight

17. Which system must we make an adjustment for at the end of the period? • Periodic Inventory • Perpetual Inventory

18. Why must we make an inventory adjustment using the periodic method at the end of the period? • To update our inventory records for a current balance. • To update our inventory for items stolen or lost.

19. Independent Practice:Homework • Read 222-225 • E8.6, 8.7

20. Decision # 2 - How do companies price (record) their inventories they sell? • Total Cost of inventory = Full purchase price of inventory + Freight paid to receive inventory + Insurance paid on the inventory while in transit.

21. Decision # 2 - How do companies price (record) their inventories they sell? GROSS PRICE • Full Cost (total cost) • Assumption: Discounts, when received are reductions in the purchase price of inventory • Purchase discount recorded ….. WHEN TAKEN NET PRICE • Discounted Cost (total cost less discount available) • Assumption: ALL Discounts should be taken. • Cost of inventory is the minimum amount due to the supplier.

22. Decision # 2 - How do companies price (record) their inventories they sell? GROSS PRICE NET PRICE • If company, FAILS to take the discount, the extra amount is a “finance charge” and is recorded as “DISCOUNTS LOST”

23. Decision # 2 - How do companies record the cost of their inventories?ABC Company buys $9,000 of inventory with terms 2/10, n/30 PERIODIC - GROSS PRICE Dr. Purchases $9,000 Cr. Acct. Payable $9,000 Purchases $9,000 PERIODIC- NET PRICE Dr. Purchases $8,820 Cr. Acct. Payable $8,820 (9,000 X 98% = 8,820) Purchases $8,820

24. Decision # 2 - How do companies record the cost of their inventories?ABC pays $200 of freight to obtain the inventory PERIODIC GROSS PRICE Dr. Freight-in $200 Cr. Cash $200 Freight-in $200 PERIODIC NET PRICE Dr. Freight-in 200 Cr. Cash $200 Freight-in $200

25. Decision # 2 - How do companies record the cost of their inventories?ABC returns $800 of inventory because it is the wrong order PERIODIC GROSS PRICE Dr. Acct. Payable $800 Cr. Purchase returns and allowances $800 Purchase Returns and Allowances $800 PERIODIC NET PRICE Dr. Acct. Payable $784 Cr. Purchase returns and allowances $784 (800 X 98% = 784) Purchase Returns and Allowances $784

26. Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory within the discount period PERIODIC GROSS PRICE Dr. Acct. Payable $8,200 Cr. Purchase Discount $164 Cr. Cash $8,036 Accounts Payable $9,000 $800 $8,200 $8,200 $0.00 PERIODIC NET PRICE Dr. Acct. Payable $8,036 Cr. Cash $8,036 Accounts Payable $8,820 $784 $8,036 $8,036 $0.00

27. What is the Balance in Inventory under Each Pricing Method? With Discount Taken…. • Net price • Purchases $8,820 • Returns and Allowances - 784 • Ending value inventory $8,036 • Gross price • Purchases $9,000 • Returns and Allowances - 800 • Discounts - 164 • Ending value inventory $8,036

28. Decision # 2 - How do companies record the cost of their inventories?ABC pays for the inventory AFTER the discount period expired. PERIODIC GROSS PRICE Dr. Acct. Payable $8,200 Cr. Cash $8,200 Accounts Payable $9,000 $800 $8,200 $8,200 $0.00 PERIODIC NET PRICE Dr. Acct. Payable $8,036 Dr. Discounts Lost $164 Cr. Cash $8,200 Accounts Payable $8,820 $784 $8,036 $8,036 $0.00

29. What is the Balance in Inventory under Each Pricing Method? With Discount LOST or NOT TAKEN…. • Net price • Purchases $8,820 • Returns and Allowances - 784 • Ending value inventory $8,036 • Gross price • Purchases $9,000 • Returns and Allowances - 800 • Ending value inventory $8,200 • Does this mean that the inventory under the gross price method is worth more? • No, it simply reflects management’s beliefs concerning discounts. • Gross = cost reduction when taken • Net = financing cost when lost

30. M-3 Sample Problem…..

31. Independent Practice:Homework • Read 222-225 • E8.6, 8.9, E8.10