LESSON Learning Objectives 5 1 Determining Merchandise Inventory

LESSON Learning Objectives 5 -1 Determining Merchandise Inventory Quantities LO 1 Describe the nature of merchandise inventory. LO 2 Account for the quantity of merchandise inventory. © 2015 Cengage Learning. All Rights Reserved.

Lesson 5 -1 The Nature of Merchandise Inventory LO 1 ● For most merchandising businesses, the cost of inventory sold is the largest cost of doing business. ● Merchandising businesses implement good control measures in managing their inventory. ● An accurate ending merchandise inventory cost must be determined to report adequately the financial progress and condition of a merchandising business. © 2015 Cengage Learning. All Rights Reserved. SLIDE 2

Lesson 5 -1 Effects of Errors in Costing Merchandise Inventory LO 1 ● Any error made in costing the ending inventory has a significant effect on the income statement. © 2015 Cengage Learning. All Rights Reserved. SLIDE 3

Lesson 5 -1 Effects of Errors in Costing Merchandise Inventory ● The statement of cash flows is the only financial statement not affected by an error in costing inventory. © 2015 Cengage Learning. All Rights Reserved. LO 1 SLIDE 4

Lesson 5 -1 Costing and Counting the Inventory LO 2 The cost of goods includes: 1. The price paid to vendors for the merchandise. This price is the purchase invoice amount less discounts, returns, and allowances granted by the vendors. 2. The cost of getting the goods to the place of business and ready for sale. This cost includes transportation charges paid by the buyer. Two methods are used to determine the number of goods in inventory: • Taking a physical count, and • Keeping a continuous count using a computer. © 2015 Cengage Learning. All Rights Reserved. SLIDE 5

Lesson 5 -1 Goods in Transit © 2015 Cengage Learning. All Rights Reserved. LO 2 SLIDE 6

Lesson 5 -1 Goods on Consignment LO 2 ● 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. © 2015 Cengage Learning. All Rights Reserved. SLIDE 7

Lesson 5 -1 Stock Record for a Perpetual Inventory System ● A form used to show the type of merchandise, quantity received, quantity sold, and balance on hand is called a stock record. 4 ● A file of stock records for all merchandise on hand is called a stock ledger. LO 2 1 2 3 1. Record the item description, stock number, reorder quantity, minimum number, and the warehouse location. 2. Record the beginning quantity. 3. Record sales transactions. 4. Enter purchase transactions. © 2015 Cengage Learning. All Rights Reserved. SLIDE 8

Lesson 5 -1 Inventory Record Used for Physical Inventory LO 2 ● A form used during a physical inventory to record information about each item of merchandise on hand is called an inventory record. © 2015 Cengage Learning. All Rights Reserved. SLIDE 9

Lesson 5 -1 Audit Your Understanding 1. What two elements are included in the cost of merchandise available for sale? ANSWER a. Cost of the beginning merchandise inventory. b. Cost of the net purchases added to the inventory during the fiscal year. © 2015 Cengage Learning. All Rights Reserved. SLIDE 10

Lesson 5 -1 Audit Your Understanding 2. If the ending merchandise inventory is understated, will the net income be overstated or understated? ANSWER Understated. © 2015 Cengage Learning. All Rights Reserved. SLIDE 11

Lesson 5 -1 Audit Your Understanding 3. Name two ways to determine the number of inventory items on hand. ANSWER a. By physically counting the items. b. By keeping a continuous record showing the number purchased and sold for each item. © 2015 Cengage Learning. All Rights Reserved. SLIDE 12