Inventory Systems Overview

Flow of Costs in Merchandising Companies

• Beginning Inventory: Starting amount of goods available for sale.
• Cost of Goods Purchased: Amount spent to acquire additional inventory.
• Cost of Goods Available for Sale: Total inventory available for sale (Beginning Inventory + Cost of Goods Purchased).
• Cost of Goods Sold (COGS): Costs assigned to goods that have been sold during the accounting period.
• Ending Inventory: Goods that remain unsold at the end of the accounting period.

Example Illustration

• Using candy bars and Monopoly money:
  • Beginning Inventory: 5 candy bars.
  • Purchases: 5 additional candy bars (Total available = 10).
  • Sales: 4 candy bars sold (Remaining = 6).

Inventory Systems

1. Perpetual Inventory System

• Definition: Detailed records of each inventory purchase and sale are maintained continuously.
• COGS Calculation: Determined each time a sale occurs.
  • Accounting Entries:
    • Debit Accounts Receivable/Cash and Credit Sales Revenue for the selling price.
    • Debit COGS and Credit Inventory for the cost of the sold item.
• Advantages:
  • Continuous update of inventory records.
  • Better control over inventory, allowing for real-time verification of stock.

2. Periodic Inventory System

• Definition: No detailed records are kept throughout the period.
• COGS Calculation: Performed at the end of the accounting period.
  • Inventory Count: A physical count is conducted to determine ending inventory.
• Calculation Steps:
  • Start with beginning inventory.
  • Add cost of goods purchased to find goods available for sale.
  • Subtract ending inventory to calculate COGS.
• Disadvantages:
  • Less control over inventory compared to a perpetual system.
  • No real-time data for inventory levels.