Lecture 5
ACCOUNTING FOR OPERATIONS
AGENDA
1. Inventory Systems
2. Inventory Costing Methods
3. Purchases and Trades
4. Bad Debts
Inventory Systems
1. Inventory Systems
Beginning Net cost of
inventory + purchases
= Merchandise
available for sale
Ending Cost of goods
inventory + sold
1. Inventory Systems
• Perpetual systems: continually update accounting
records for merchandising transactions
• Periodic systems: accounting records relating to
merchandise transactions are updated only at the end of
the accounting period
Inventory Costing Methods
2. Inventory Costing Methods
Inventory costs include all expenditures necessary to
bring an item to a salable condition and location.
Minus Invoice Plus
Discounts and Insurance
Allowances Cost
Plus Import Plus
Duties Plus Storage
Freight
2. Inventory Costing Methods
FOB Shipping Point
Public
Carrier
Seller Buyer
Ownership passes
to the buyer here.
Public
Carrier
Seller FOB Destination Point Buyer
2. Inventory Costing Methods
Inventory Costing Under a Perpetual System
Inventory
affects . . .
Balance Income
Sheet Statement
The matching
principle requires
matching costs
with sales
2. Inventory Costing Methods
Inventory Costing Under a Perpetual System
First-In, First-Out (FIFO) Assumes costs flow in the order incurred
Last-In, First-Out (LIFO) Assumes costs flow in the reverse order
incurred
Assumes costs flow at an average of
Weighted Average
the costs available
2. Inventory Costing Methods
Inventory Costing Under a Perpetual System
Here is information about the mountain bike inventory of Trekking for the
month of August.
Date Activity Units Acquired at Cost Units Sold at Retail Inventory
Aug. 1 Beg. Inventory 10units @ £ 91 = £ 910 10
Aug. 3 Purchased 15units @ £ 106 = £ 1,590 25
Aug. 14 Sales 20 units @ £130 5
Aug. 17 Purchased 20units @ £ 115 = £ 2,300 25
Aug. 28 Purchased 10units @ £ 119 = £ 1,190 35
Aug. 31 Sales 23 units @ £150 12
Totals 55 £ 5,990 43
2. Inventory Costing Methods
First-In, First-Out (FIFO)
Oldest Costs Cost of Goods Sold
Recent Costs Ending Inventory
2. Inventory Costing Methods
First-In, First-Out (FIFO)
2. Inventory Costing Methods
Last-In, First-Out (LIFO)
Recent Costs Cost of Goods Sold
Oldest Costs Ending Inventory
2. Inventory Costing Methods
Last-In, First-Out (LIFO)
2. Inventory Costing Methods
Weighted Average
When a unit is sold, the average cost of each
unit in inventory is assigned to cost of goods sold
Cost of Goods Units on hand on
Available for Sale
÷ the date of sale
2. Inventory Costing Methods
Weighted Average
2. Inventory Costing Methods
Effects on Financial Statements
Purchases and Trades
3. Purchases and Trades
Service Companies
Minus Equals
Revenues Expenses Net income
3. Purchases and Trades
Merchandising Companies
Manufacturer Wholesaler Retailer Customer
3. Purchases and Trades
Merchandising Companies
Cash Sale Credit Sale
Cash
collection Purchases
Purchases
Merchandise
Cash Account
inventory
sales receivable
Merchandise
inventory Credit sales
3. Purchases and Trades
Merchandise Purchase
On November 2, Z-Mart purchased £1,200 of
merchandise inventory with cash
3. Purchases and Trades
Merchandise Purchase Discount
A deduction from the invoice price granted to induce
early payment of the amount due.
Credit Period
Credit Discount Period
Terms
Time
Amount Due: Invoice Due: Full Invoice Price
Due price minus
discount
Date of
Invoice
3. Purchases and Trades
Merchandise Purchase Discount
2/10,n/30
Number of Days
Discount Is Otherwise,
Discount Available Net (or All) Credit
Percent Is Due in 30 Period
Days
3. Purchases and Trades
Merchandise Purchase Discount
On November 2nd, T-Mart purchased 1,200 of merchandise
inventory on account, credit terms are 2/10, n/30. On
November 12th, T-Mart paid the amount due on the purchase
of November 2nd .
3. Purchases and Trades
Merchandise Sales
T-Mart completes a credit
sale for £1,000 on
November 12th, the
merchandise cost £800.
Terms of 2/10, n/60, and
the account was paid in full
within the discount period.
Bad debts
4. Bad Debts
Some customers may not pay their
account. Uncollectible amounts are
referred to as bad debts.
There are two methods of accounting
for bad debts:
⚫Direct Write-Off Method
⚫Allowance Method
4. Bad Debts
Direct Write-off Method
On January 23rd, Taylor, a On March 11th, Taylor was able to
customer of MCH cannot pay the make full payment to MCH for the
£520 owed to MCH. We must amount previously written-off.
recognize the loss.
4. Bad Debts
Allowance Method
At the end of its first year of operations, MCH estimates that
£1,500 of its accounts receivable will prove uncollectible. The
total accounts receivable balance at December 31, 2021, is
£20,000, and the company had total credit sales of £300,000
during the year.
Contra-asset account
