Lecture Notes: Perpetual Inventory System

Introduction to Merchandise Inventory Costs

• The lecture addresses how merchandise inventory costs are determined under a perpetual inventory system.
• Previously learned formulas include:
  • Merchandise Inventory: Number of units on hand at year-end × unit cost = Ending merchandise inventory.
  • Cost of Goods Sold (COGS): Number of units sold × unit cost = Cost of goods sold.

Perpetual Inventory System

• Companies use computerized systems to track inventory, backed by physical counts.
• Example: Smart Touch Learning's records for August for tablet model TAB0503.

August Inventory Transactions

• August 1: Beginning inventory - 2 units at $350 each.
• August 5: Purchased 4 tablets at $350 each (total 6 units).
• August 15: Sold 4 tablets (remaining 2 units in inventory).
• August 26: Purchased 12 tablets at $350 (total 14 units).
• August 31: Sold 10 tablets (remaining 4 units).

Cost Calculations

• Ending Inventory (August): 4 units × $350 = $1,400.
• COGS (August): 14 units × $350 = $4,900.

Changing Costs Scenario

• Complications arise when costs change (e.g., increase over the month).
• Need to assign unit costs using one of four methods:
  • Specific Identification Method
  • FIFO (First-In, First-Out) Method
  • LIFO (Last-In, First-Out) Method
  • Weighted Average Inventory Method

Inventory Costing Methods

Specific Identification Method

• Tracks specific costs of each unit.
• Suitable for unique items (e.g., cars, jewelry, real estate).
• Not practical for identical inventory items.

Example

• August Transactions:
  • Total purchases: 16 units at $6,000.
  • Total sales: 14 units at $5,200.
  • Ending inventory: 4 units at $1,500.
• Requires specific costs identification when selling inventory.

FIFO (First-In, First-Out) Method

• First costs into inventory are the first costs out.
• Ending inventory based on most recent purchase costs.

Example

• January/February Transactions:
  • January 1: 3 tablets at $300.
  • January 15: 3 tablets at $310.
  • February 8: 3 tablets at $320.
  • February 25: Sell 3 tablets.
• August Transactions:
  • Total purchases: 16 units at $6,000.
  • Total sales: 14 units at $5,180.
  • Ending inventory: 4 units at $1,520.

Cost of Goods Available for Sale

• Sum of costs spent on inventory available for sale.
• For August: 2 units at $350, 4 at $360, 12 at $380. Total = $6,700.
• Formula: Ending Inventory + COGS = Cost of Goods Available for Sale.

Journal Entries under FIFO

• Purchases (e.g., August 5): Merchandise Inventory debited, Accounts Payable credited.
• Sales: Two entries—one to record sales revenue, another for COGS and inventory reduction.
• Example: August 15 sale, $1,420 COGS, two entries for sale and COGS.

Conclusion

• Next session will cover LIFO and Weighted Average methods.

These notes cover the perpetual inventory system methodology and provide examples using Smart Touch Learning's monthly transactions.