© Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 1 periodic perpetual © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 2 • continuously discloses inventory on hand • increases in inventory debited to Inventory (and posted to subsidiary ledger) • two entries to record sales transactions REVENUE: Accounts Receivable -- Customer retail Sales retail REDUCTION IN INVENTORY: Cost of Goods Sold cost Inventory cost • physical inventory still needed annually to compare with and update inventory records © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 3 • increases recorded in Purchases • at time of sale, record revenue but no entry for reduction in inventory • physical inventory (actual count) necessity at end of period to determine cost of goods sold © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 4 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 5 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 6 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions As seen in Home Depot, October 12,Gregg. 2011 All Rights Reserved. © Copyright 1999, 2005, 2011 by M. Ray 7 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 8 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 9 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 10 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 11 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 12 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 13 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two As seen in Home Depot, October 12, 2011 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 14 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 15 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two • shipping terms determine when title passes © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 16 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two • shipping terms determine when title passes – FOB SP © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 17 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two • shipping terms determine when title passes – FOB SP -- title passes when goods are shipped © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 18 • necessity for both periodic and perpetual • goal: count every item; do not count any item twice • have plan and follow it – establish proper “cut-off” of transactions – business often closes in order to count – best to count in “teams” of two • shipping terms determine when title passes – FOB SP -- title passes when goods are shipped – FOB D © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 19 • necessity for both periodic and perpetual D • goal: count every item; do not count any item B twice U • have plan and follow it Y – establish proper “cut-off” of transactions Mack’s Trucking E – business often closes in order to count R – best to count in “teams” of two • shipping terms determine when title passes – FOB SP -- title passes when goods are shipped – FOB D -- title passes when goods arrive © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 20 • most active element of a merchandising business • principal source of revenue • largest current asset • largest deduction from revenue © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 21 EI GAFS P To Balance Sheet To COGS Income Statement BI © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 22 Effects of Misstatement Inventory Net Income Assets © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. Capital 23 • in order expenditures were made © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 24 • in order expenditures were made -- FIFO © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 25 • in order expenditures were made -- FIFO • in reverse order in which expenditures were made © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 26 • in order expenditures were made -- FIFO • in reverse order in which expenditures were made - LIFO © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 27 • in order expenditures were made -- FIFO • in reverse order in which expenditures were made - LIFO • average of expenditures © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 28 Time Time Time Time Time Time Time Time Time Balance Sheet MI Income Statement COGS © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 29 Balance Sheet MI Last In First OUT Time Time Time Time Time Time Time Time Time Income Statement COGS © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 30 Time Time Time Time Time Time Time Time Time Rising Prices Balance Sheet Income Statement FIFO LIFO MI FIFO LIFO COGS NI © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 31 • • • • • Extension of Lecture Handout Video Link on Class Web Site Demonstration Exercise Strongly recommended before first HW assignment © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 32 © Copyright 1999, 2005, 2011 by M. Ray Gregg. All Rights Reserved. 33