Merchandising Inventory

Unit 4 Quest will be on Wed December 10.

A merchandising business is a business that buys goods and sells goods at a profit. (=buy low and sell high) It could be a wholesaler who buys from

manufacturers (e.g. Apple) and sells to retailers. (E.g. Bestbuy)

It could be a retailer who buys from the wholesaler and sells to the public. (E.g. Wal-Mart and Bestbuy)

The quantity of merchandise on hand is called merchandise inventory or inventory or stock-in-trade

Two types of Inventory system

Periodic Inventory system – you will learn it in grade 11 accounting. (simpler and easier accounting so small businesses use this system.)

Perpetual Inventory system -- you will learn it in grade 12 accounting. (more complex so Big corporations typically use this system.)

Dragon’s Den: How much does it cost to make one unit? What are they asking? What is COGS? In reality COGS is not that easy to figure out.

Periodic Inventory Method:The cost of the inventory sold is

calculated at the end of the fiscal period using the formula below:

CGS = Cost of BI + Cost of GP - EI

CGS = Cost of Goods soldBI = Beginning InventoryGP = Goods purchasedEI = Ending Inventory

Periodic Inventory Method:CGS and CGP will appear in Income Statement whereas EI will appear in Balance sheet under “current asset” right after accounts receivable.

Many companies use Periodic Inventory method because this is relatively easy and inexpensive.

Companies, which use periodic inventory method, will typically calculate CGS only once a year at year end.

To calculate the cost of goods sold, three figures are needed:

The beginning inventory figure (last year’s ending inventory figure)

The cost of goods purchased figure (accumulated throughout the year and we will use the ending balance of in “Purchases” account)

The ending inventory figure – obtained by taking a physical inventory (counting and valuing the entire inventory) on December 31. (similar to “Supplies” account)

Periodic Inventory Method:At the fiscal year-end such as December 31, a

physical inventory must be taken in order to:1. Update the current asset on the balance

sheet just like office supplies account2. Calculate the cost of goods sold for the

income statement3. To be used as the beginning inventory for the

next accounting periodMerchandise Inventory is a Current Asset on

the balance sheet as it will be sold within a year.

Example – Use the formula!Units Dollars

Beginning Inventory 1700 $42,500Merchandise Purchased 5500 143,000Total Goods Available for Sale ? ?COGS 5800 149,100Ending Inventory ? ?

Use the equation to calculate the total number of units and dollar value for ending inventory, as well as Total Goods Available for Sale

Example – Use the formula!

Answers:Total Goods Available for Sale =Units: 7200 Dollars: $185,500Ending Inventory =Units: 1400 Dollars: $36,400

Cost of Goods Sold on the Income Statement

The inventory that was NOT sold belongs on the balance sheet – appears as “Ending Inventory or Inventory” in Balance Sheet.

The cost of the inventory that WAS sold – is known as Cost of Goods Sold – which belongs to the income statement

Ie: an item that cost $75.00 to produce was sold for $100.00. The gross profit is $25.00

Cost of Goods Sold on the Income Statement

The total cost of goods sold is usually the biggest expense figure for a merchandising business

Read and understand Page 411 in order to understand how Cost of Goods sold number will affect Income Statement.

“Purchase” account is in expense category of the ledger.

Eastern Trading CompanyIncome Statement

Year Ended Dec 31 2014

RevenueSales 231 967

Cost of Goods SoldInventory, January 1 $55 325Purchases 120 402Cost of Goods Available for Sale 175 727Less Inventory, December 31 (57 350)Cost of Goods Sold 118 377

Gross Profit 113 590

Operating ExpensesAdvertising expense 20,000Rent expense 20,000Wages expense 20,000Utilities expense 20,000

Total Expenses (80,000)Net Income 33 590

Drawbacks of Periodic Inventory System

When the periodic inventory system is used, financial statements cannot be obtained unless a physical inventory is taken - very time consuming. However, it is also very easy to manage (especially for small businesses such as a convenience store or pharmacy store)

We can calculate cost of goods sold only once a year when we do the physical inventory.

The business owner do not have to hire accountant, when they use periodic system.

Classwork / Homework!Review Questions pg. 401 #2, 7, 8Pg. 402 #2, #3, #4, #5