Perpetual Inventory SystemPerpetual Inventory © Detailed record of items in stock is kept up to date on an ongoing basis o Asitems sold, info. is transferred directly to store’s central computer which is programmed to make the appropriate deductions from the inventory and make accounting entries o Sales returns are generally handled by separate department o System cannot automatically know when goods are lost, stolen or broken; therefore have to do manual check of inventoryPurchases o When goods are purchased for resale, inventory account is immediately updated by the cost price of the merchandise. At any time, the business can look in the general ledger and see the book value of the inventory on hand. Remember -- this is the book value and may not be 100% accurate (damaged goods, theft, clerical errors, etc.). Merchandise Inventory (at Cost Price) 3800 Bank or A/P 3800 To record the Purchase of Inventory in Perpetual SystemPurchase Returns & Allowances o Goods purchased may be damaged, defective, of inferior quality, or they may not meet purchaser’s specifications o Goods may be returned or purchase price may be reduced (an allowance) ° Cash or Accounts payable 300 Merchandise Inventory (for amount of return or adjustment) 300Quantity and Purchase Discounts ° reduction in price due to the quantity being purchased ° reduction in price due to early payment of amount due ° Accounts payable 3500 Merchandise Inventory (for amount of discount) 70 Cash 3430Freight Costs o Purchase agreement indicates when ownership of the goods is transferred from buyer to seller ° » Buyer accepts ownership at place of shipping and pays for shipping costs Merchandise Inventory 150 Cash 150 Buyer accepts ownership when goods are delivered to buyer’s place of business and seller pays freight costs Seller debits for cost of shippinge@ °°] Summary of Purchases Merchandise Inventory (Purchase) May 4 3800 | May9 300 (Purchase Return) (Freight) 4 150 14 70 (Purchase Discount)Sale of Merchandise (two journal entries needed) o The first ony identifies the sale at the selling price. A second entry shows the merchandise going out of the business and the inventory account decreasing by the cost price of the goods (the price the business paid for the merchandise). Step 1 Bank or Accounts Receivable (at Selling Price) 3800 Sales (at Selling Price) 3800 To record the sale of merchandise in a perpetual system Step 2: Cost of Goods Sold (at cost price) 2400 Merchandise Inventory (at cost price) 2400 To record the inventory sold at cost price in a perpetual systemSales Taxes © Collected by merchandising companies on the goods that they sell o Periodically remitted to government o Sales taxes collected are not revenue Treated as a liability until paid (as they are due to the government) o recorded in HST Payable accountSales Returns & Allowances ° when customers return merchandise to seller for credit or refund ° when seller grants customers a price reduction ° Sales returns and allowances 300 Accounts receivable or cash 300 ° Merchandise inventory 140 (recorded at orig. cost) Cost of goods sold 140 To record cost of returned goods.Quantity and Sales Discounts ° Reduction in selling price due to the volume of goods purchased Sale is recorded at reduced price Discount offered for early payment of bill Discount amount taken is debited to (a contra revenue account) Original amount in Sales is not changede Journal Entry Cash 3430 Sales Discount 70 Accounts Receivable 3500 To record collection of invoice #731 within discount periodSummary of Sales Transactions Sales Sales Returns & Allowances May 4 3800 May9 300 Sales Discounts Cost of Goods Sold May 14 70 May 4 2400| May9 140 Bal. 2260COGS o Cost of beginning inventory + cost of goods purchased = Cost of goods available for sale — cost of ending inventory = cost of goods sold i.e.42500+143000=185500-36400 = 149100 COGS o Calculation is completed after each saleCompleting the Accounting Cycle o Same types of adjusting entries as a service company © One additional adjustment for inventory » To ensure the recorded inventory amount agrees with the actual quantity on hand o A physical count is an important control feature A perpetual system indicates what should be there An inventory count will determine what exists © Additional accounts to be closed:Merchandise Inventory o Inventory counted at fiscal year-end o It becomes the beginning inventory figure for the next fiscal period o If the amount on hand is different than what is displayed in the merchandise inventory account, an adjustment needs to be made fyAdjusting Entry Cost of Goods Sold 500 Merchandise Inventory 500 To record difference between inventory records and physical units on hand.Financial Statements o Merchandisers use the classified balance sheet o Two forms of income statements are widely used: multiple-step and single-stepMultiple-Step Income Statement Five main steps: 1 a 3. 4 Net Sales Gross Profit Income from Operations Non-operating Activities (interest, dividend revenue, gains from sale of property, interest expense, losses) Net Incomeee Multiple-Step Income Statement . Bales 6 490,000 Calculation of Net sales and Less eles returss and ollowences Sales discounts Gross profit Neteales Sslaries expense Calculation of Income from | Utibe > exe Pe f Hevenene operations | Frei out “Total operating expenses Maree one etlaetee Calculation of Non-operating Tatalnomoperadng ravenveand gain activities and Net income ~) || insrecton pence Totalron-operating expense and [noe Casuaty lore om yandaliem Netneneneratna revenue@ © © | Single-Step Income Statement Netsales Interestrevenue Gain on sale ofequipment Towl Revenues Costofgoods sold $315,000 Operating expenses 114,000 Interestexpense 1,800 Casualty loss rom vandalism 200 Total expenses All data are classified as either (1) revenues or (2) expensese°° | Classified Balance Sheet MerchandiseGross Margin Ratio o The relation between sales and COGS Gross Margin/Net Sales = Gross Margin Ratio i.e. (in millions) $645.1 /$1396.5 = 46.2% Means that each $1 of sales yields about 46.2 cents in gross margin to cover all other expenses