University - Year 2

Accounting Theories

LAY AWAY SALE

 Lay away sale is a type of sale in which goods are delivered only when the buyer makes the final
payment in a series of installments.
 This is different from a regular installment sale wherein goods are delivered to the buyer at the
time of sale.
 The goods sold under a lay away sale are included in the seller’s inventory until the goods are
delivered to the buyer.
 Delivery is made after the final installment payment is paid.
 However, when significant payments have already been made, the goods may be included in the
buyer’s inventory, provided delivery is probable.

FINANCIAL STATEMENT PRESENTATION

 All items that meet the definition of inventory are presented on the statement of financial position
as one line item under the caption “Inventories.”
 The breakdown (as finished goods, WIP and Raw materials) is disclosed in the notes.

INVENTORY SYSTEMS
1. Perpetual inventory system
 All transactions involving the:
a. acquisition,
b. purchase returns,
c. incurrence of freight-in,
d. sales and sales returns
are recorded in the “Inventory” account (real account) and the “Cost of sales” account, as
appropriate.

2. Periodic inventory system

 Uses the “Purchases,” “Purchase returns,” and “Freight-in” accounts (nominal accounts).
 Cost of sales is determined only after a physical count is performed.
 Under the periodic inventory system, cost of sales is determined using the following formula:

INVENTORY ERRORS UNDER THE PERIODIC SYSTEM

Ending inventory: Profit ------ Direct relationship
 if ending inventory is overstated, Profit is also overstated