Chapter 8
Expenditure and Inventory Process

What are the 4 Activities in the
Expenditure Process?
◦
◦
◦
◦
Determine the need for goods and services
Select suppliers and Order goods/services
Receive goods/services
Pay suppliers of goods/services
Essential Questions:

How do companies keep track of their
inventories they sell?

How do companies record the cost of
their inventories?
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.

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
VALUE of inventory is the
SAME

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)
Merchandising Vs. Manufacturing ?

Inventory purchased
to be resold – BUY

Inventory purchased
to be used to MAKE
products

The Account for
Inventory is called,

The Account for
Inventory is called,
“Merchandise
Inventory” OR
“Inventory”

“Direct Materials
Inventory”
◦ Ex. Clothes
◦ Ex. IPhone – plastic
cases

“Or Purchases”
◦ glue
Decision # 1 - How do companies
keep track of their inventories they
sell?
PERPETUAL




PERIODIC
Determine cost of goods
sold and ending
inventory on a
continuous basis
“Running Balance”
Typically MORE
expensive items

Ex. Cars, Jewelry,
Computers



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
Exercises 8.4 and 8.5
E8.4 Case 1: $54,000 + $72,000 = $126,000; $126,000 $41,000 = $85,000.

Case 2: $172,000 + $13,000 = $185,000; $185,000 $37,000 = $148,000.

Case 3: $88,000 + $26,000 = $114,000; $114,000 $67,000 = $47,000.

E8.5 Company A: $667,800 + $4,776,200 = $5,444,000;
$5,444,000 - $819,900 = $4,624,100.

Company B: $2,940,700 - $388,200 = $2,552,500;
$2,940,700 - $1,457,900 = $1,482,800.

Company C: $534,800 + $163,900 = $698,700;
$698,700 - $647,600 = $51,100.

Decision # 1 - How do companies
keep track of their inventories they
sell?
PERPETUAL
 Purchases –
◦


“Inventory Account”
Discounts of
◦


“Inventory Account”
Freight (or insurance)
◦

“Inventory Account”
Returns and Allowances

PERIODIC
 Purchases-
“Inventory Account”
“Purchases Account”
Returns and Allowances

“Purchases and Returns
Account”

Freight (or insurance)
◦

“Freight-in” or Insurance”
Discounts of
◦
“Purchase Discounts”
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
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
Purchases
$9,000
Freight-in
$200
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
PERIODIC
Dr. Acct. Payable $800
Cr. Purchase returns and
allowances $800
Purchases
Freight – in
Inventory
$9,000
$200
$800
$9,000
$200
Purchase Returns and Allowances
$800
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
PERIODIC
Dr. Acct. Payable $8,200
Cr. Cash $8,200
Accounts Payable
$800
$8,200
$8,200
$8,200
$9,000
$8,200
$0.00
$0.00
With a perpetual system all events
that affect the inventory are
recorded as increases or decreases
to:
A.
B.
C.
Purchases Account
Inventory Account
Separate temporary accounts depending
on transaction: Purchases, Returns and
Allowances, Freight
With a periodic system all events
that affect the inventory are
recorded as increases or decreases
to:
A.
B.
C.
Purchases Account
Inventory Account
Separate temporary accounts depending
on transaction: Purchases, Returns and
Allowances, Freight
Which system must we make an
adjustment for at the end of the
period?
A.
Periodic Inventory
B.
Perpetual Inventory
Why must we make an inventory
adjustment using the periodic
method at the end of the period?
A.
B.
To update our inventory records for a
current balance.
To update our inventory for items
stolen or lost.
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.

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.
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”
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
PERIODICNET PRICE
Dr. Purchases $8,820
Cr. Acct. Payable $8,820
(9,000 X 98% = 8,820)
Purchases
$8,820
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
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
PERIODIC
NET PRICE
Dr. Acct. Payable $784
Cr. Purchase returns and
allowances $784
(800 X 98% = 784)
Purchase Returns
and Allowances
$800
Purchase Returns
and Allowances
$784
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
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
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
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
Independent Practice:
Homework
A.
B.
Read 222-225
E 8.6, 8.7, 8.8, 8.9, E8.10