Inventory Costs and Relationships LIABILITIES Merchandise ASSETS OWNER'S Inventory EQUITY Net Income Cost of COSTS REVENUES Mdse sold &EXPENSES If merchandise inventory is overstated Cost of merchandise sold is understated Gross profit and net income are. . overstated Ending owner's equity is .... overstated c5-6
C5 - 6 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS &EXPENSES Inventory Costs and Relationships Merchandise Inventory Cost of Mdse. Sold If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . overstated understated overstated overstated Net Income
Inventory Costs and Relationships LIABILITIES Merchandise ASSETS OWNER'S Inventory EQUITY Net Income Cost of COSTS REVENUES Mdse sold &EXPENSES If merchandise inventory is understated Cost of merchandise sold is overstated Gross profit and net income are... understated Ending owners equity is..... understated c5-7
C5 - 7 LIABILITIES OWNER’S EQUITY REVENUES ASSETS COSTS &EXPENSES Inventory Costs and Relationships Merchandise Inventory Cost of Mdse. Sold If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . . understated overstated understated understated Net Income
Advantages of Using Perpetual Inventory Continuous determination of inventory value Continuous determination of gross profil Affordable with com puters, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those items c5-8
C5 - 8 Continuous determination of inventory value Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on those items Advantages of Using Perpetual Inventory
Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse Inventory Mdse Inventory AAccts.payable 5,000 5,000 A5,000 Cost of Mdse. Sold In a perpetual system, A Purchase on account Mdse Inventory is an B Return of merchandise active asset account All changes are recorded as they occur. c5-9
C5 - 9 Perpetual Inventory System General Journal Description Debit Credit General Ledger Mdse. Inventory 5,000 Accts. Payable 5,000 Mdse. Inventory A 5,000 Cost of Mdse. Sold A In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise A B
Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse Inventory Mdse Inventory AAccts.payable 5,000 5,000 A5,0001000(B Ba4,000 B Accts Payable 1,000 Mdse Inventory 1000 Cost of Mdse. Sold In a perpetual system, A Purchase on account Mdse Inventory is an BReturn of merchandise active asset account All changes are recorded Sale of merchandise as they occur. c5-10
C5 - 10 Perpetual Inventory System General Journal Description Debit Credit General Ledger Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Mdse. Inventory A 5,000 Cost of Mdse. Sold A 1,000 B B Bal 4,000 In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandise A B C