BBAW2103

FINANCIAL ACCOUNTING
TUTORIAL 3
 TOPIC 7
TRADING BUSINESS ENVIRONMENT
 Operating Cycle for a Trader
Cash Sale Credit Sale

Cash
Purchases collection Purchases

Merchandise
Cash Account
inventory
sales receivable

Merchandise
inventory Credit sales
Important Transactions
 Quantity Discounts

Used by manufacturers and wholesalers to offer better

prices for greater quantities purchased.

Example
Example
Matrix,
Matrix, Inc.
Inc. offers
offers aa 30%
30% trade
trade
discount
discount onon orders
orders ofof 1,000
1,000
units
units or
or more
more of of their
their popular
popular
product
product Racer.
Racer. Each
Each
Racer
Racer has
has aa list
list price
price of
of RM5.25.
RM5.25.
 Cash Discounts

2/10,n/30
Number
Number ofof
Days
Days Otherwise,
Otherwise,
Discount
Discount Discount
Discount Is
Is Net
Net (or
(or All)
All) Credit
Credit
Percent
Percent Available
Available Is
Is Due
Due Period
Period
 Cash Discounts

A deduction from the invoice price granted to induce early

payment of the amount due.

Terms

Time Discount Period Credit Period

Due
Full amount Full amount due
less discount

Purchase or Sale
 Sales Discounts

The
The terms
terms for
for when
when payments
payments for
for
merchandise
merchandise areare to
to be
be made
made are
are
called
called credit
credit terms.
terms.

IfIf buyer
buyer isis allowed
allowed anan
amount
amount of of time
time toto pay,
pay, itit is
is
known
known as as the
the credit
credit period.
period.
Sales Discount
Credit Terms

If invoice is
paid within 10 Invoice for
days of RM1,500
invoice date Terms:
2/10, n/30

RM1,470 paid
(less 2% as a
cash discount)
 Sales Discount

Credit Terms
If invoice is
NOT paid
Invoice for Cash Discounts
within 10 days
RM1,500
of invoice
Terms:
date
2/10, n/30
RM1,500 PAID
 Sales Return and
Allowance(Return Inward)
Merchandise
Merchandise that
that is
is returned
returned toto the
the
vendor
vendor is
is referred
referred toto as
as aa sales
sales
return.
return.
IfIf there
there is
is aa defect
defect inin the
the product
product oror
the
the wrong
wrong itemitem was
was shipped,
shipped, the the
seller
seller maymay reduce
reduce the
the initial
initial price
price at
at
which
which thethe goods
goods were
were sold.sold. This
This is
is
known
known as as aa sales
sales allowance.
allowance.
Transportation Costs

Transportation
Costs
 Transportation Costs
• The terms of a sale should indicate when the
ownership of the merchandise passes to the
buyer.
• This point determines which party, the buyer
or the seller must pay the transportation
costs.
 FOB Shipping Point
Buyer pays freight costs

Fruit
Express

AA shipping
shipping term
term that
that means
means that that the
the buyer
buyer isis
responsible
responsible for
for all
all freight
freight costs
costs while
while the
the
goods
goods are
are inin transit.
transit.
 FOB Destination
Seller pays freight costs

Fruit
Express

AA shipping
shipping term
term that
that means
means that
that the
the seller
seller isis
responsible
responsible foe
foe all
all freight
freight costs
costs until
until the
the
goods
goods reach
reach their
their destination.
destination.
 Balance Sheet
Merchandising Company
Balance Sheet
December 31, 2005
Assets Liabilities
Cash $ 10,200 Accounts payable $ 1,200
Merchandise Inventory 1,200 Notes payable 4,000
Equipment 16,000 Total liabilities $ 5,200
Equity 22,200
Total assets $ 27,400 Total liabilities and $ 27,400
 TOPIC 8
ACCOUNTING FOR INVENTORY
Cost of Inventories
 Periodic System
• A method of determining the cost of
merchandise sold and the amount of
merchandise on hand.
• Under this method, the inventory records do
not show the amount available for sale or the
amount sold during the period.
 Perpetual System
• Under this method, each purchase and sale
of merchandise is recorded in the inventory
and the cost of merchandise sold accounts.
• The amount of merchandise available for
sale and the amount sold are continuously
disclosed in the inventory records.
Importance of inventory control
 Inventory is a significant asset and for many
companies the largest asset.
 Inventory is central to the main activity of
merchandising and manufacturing
companies.
 Mistakes in determining inventory cost can
cause critical errors in financial statements.
 Inventory must be protected from external
risks ( such as fire and theft) and internal
fraud by employees.
Inventory Valuation
 Perpetual
Perpetual Inventory
Inventory Costs
Costs
Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200

The firm begins the year with 10

units of Item 127B on hand at a
total cost of RM200.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 4,4, 77 units
units of
of Item
Item
127B
127B are
are sold
sold atat RM30
RM30 each.
each.
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60

The
The sale
sale of
of 77 units
units leaves
leaves aa
balance
balance of of 33 units.
units.

On
On January
January 4,4, 77 units
units of
of Item
Item
127B
127B are
are sold
sold atat RM30
RM30 each.
each.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 10,
10, the
the firm
firm purchased
purchased
eight
eight units
units at
at RM21
RM21 each.
each.
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168

Because the purchase price of RM21 is

different than the cost of the previous 3
units On
on hand, the inventory
January 10, the balance of
firm
On January 10, the firm
11 units is accounted for separately.
purchased
purchased eight
eight units
units at
at RM21
RM21
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 22,22, the
the firm
firm sold
sold
four
four units
units for
for RM31
RM31 each.each.
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

On January 22,
On January 22, the the
Unit Total Unit Total Unit Total
firm
Date firm
sold
Qty. sold
four
Cost four
units
units
Cost Qty. Cost Cost Qty. Cost Cost
for RM31 each.
Jan. 1 for RM31 each. 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147

Of the four units sold, three are

from the first units in (fifo) at a
cost of RM20.
FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 28,
28, the
the firm
firm
sold
sold two
two units
units at
at RM32.
RM32.
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 3 20 60
1 21 21 7 21 147
28 2 21 42 5 21 105

On
On January
January 28,
28, the
the firm
firm
sold
sold two
two units
units at
at RM32.
RM32.
 FIFO Perpetual Inventory Account

Inventory
Inventorycost
costdata
datato
todemonstrate
demonstrate
FIFO
FIFOand
andLIFO
LIFOPerpetual
PerpetualSystems
Systems
Item
Item127B
127B Units
Units Cost
Cost Price
Price
Jan.
Jan. 11 Inventory
Inventory 10
10 RM20
RM20
4Cost
4 Saleof
Sale 77 RM30
RM30
10
10 Purchase
Mdse. Sold
Purchase 88 21
21
22
22 Sale
Sale 44 31
31
28
28 Sale
Sale 22 32
32
30
30 Purchase
Purchase 10
10 22
22

On
On January
January 30,
30, purchased
purchased ten
ten additional
additional
units
units of
of Item
Item 127B
127B at
at RM22
RM22 each.
each.
 FIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 On
On January
January 30,
30, purchased
purchased
7 20 140 3 20 60
10 8ten
ten additional
21 168 units
additional units of
of Item
Item 3 20 60
8 21 168
22
127B
127B at
at RM22
RM22 each.
3 each.20 60
1 21 21 7 21 147
28 2 21 42 5 21 105
30 10 22 220 5 21 105
10 22 220
Totals 18 RM388 13 RM263 15 RM325
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200

The
The firm
firm begins
begins thethe year
year with
with
10
10 units
units of
of Item
Item 127B
127B onon
hand
hand at
at aa total
total cost
cost of
of
RM200.
RM200.
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60

On
On January
January 4,4, the
the firm
firm sold
sold
77 units
units at
at RM30
RM30 each. each.
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168

On
On January
January 10,
10, the
the
firm
firm purchased
purchased eight
eight Note
Note that
that aa new
new
units layer
layer isis formed.
formed.
units at
at RM21
RM21 each.
each.
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
OnOfJanuary
Of
On the
January 22,
the 44 units the
22,sold,
units the all
sold, all come
come
firm
fromfirm
from thesells
most
sells
the four
most recent
recent purchase
four purchase
units
at
units at
at RM31
at aa cost of
of RM21
RM31
cost RM21 each.
each.
each.
each.
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42

On
On January
January 28,28, sold
sold
two
two units
units at
at RM32
RM32
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
On
On January
January 30,
30, purchase
purchase 10 22 220
10
10 units
units at
at RM22
RM22 each.
each.
 LIFO Perpetual Inventory Account
Item 127B

Purchases Cost of Mdse. Sold Inventory Balance

Unit Total Unit Total Unit Total

Date Qty. Cost Cost Qty. Cost Cost Qty. Cost Cost
Jan. 1 10 20 200
4 7 20 140 3 20 60
10 8 21 168 3 20 60
8 21 168
22 4 21 84 3 20 60
4 21 84
28 2 21 42 3 20 60
2 21 42
30 10 22 220 3 20 60
2 21 42
10 22 220
Totals 18 RM388 13 RM266 15 RM322
 FIFO
FIFO Periodic
Periodic
200 units @ RM9 Jan. 1 Beginning
Inventory
300 units @ RM10 Mar. 10 Purchase

400 units @ RM11 Sept. 21 Purchase

100 units @ RM12 Nov. 18 Purchase

1,000 units available
for sale during
year
 FIFO
FIFO Periodic
Periodic
200 units @ RM9 =RM1,800 Jan. 1

300 units @ RM10 = 3,000 Mar. 10

400 units @ RM11 = 4,400 Sept. 21

100 units @ RM12 = 1,200 Nov. 18

1,000 units available RM10,400
for sale during
year Cost of merchandise
available for sale
 FIFO
FIFO Periodic
Periodic
A
A physical
physical count
count on
on
December
December 31 31 reveals
reveals that
that
700
700 of
of the
the 1,000
1,000 units
units
have
have been
been sold.
sold.

Using
Using fifo,
fifo, the
the first
first units
units
purchased
purchased are are theoretically
theoretically thethe
first
first units
units sold.
sold. We We begin
begin the
the
count
count with
with January
January 1. 1.
 FIFO
FIFO Periodic
Periodic
Sold
200 these
units @ 200
RM9 =RM1,800
=RM 0 Jan. 1

Sold
300 these
units 300
@ RM10 = 3,0000 Mar. 10

400
Soldunits
200 200 @of RM11
these = 4,400
2,200 Sept. 21

100 units @ RM12 = 1,200 Nov. 18

1,000 units available RM10,400
RM 3,400
for sale during
year Ending inventory
 FIFO
FIFO Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale
RM10,400
RM10,400
Less
Less ending
ending inventory
inventory 3,400
3,400
Cost
Cost of
of merchandise
merchandise sold
sold RM
RM 7,000
7,000
 Summary of FIFO Periodic
Cost of
Merchandise Merchandise
Available Sold
Purchases for Sale
RM1,80 200 units at RM9
Jan. 1
0
200 units at RM9 RM1,80
0 RM3,00 300 units at
Mar. 10 0 RM10
300 units at RM10 RM3,00 200 units at
RM2,20
0 0 RM11
Sep. 21
RM7,00 700 units
400 units at RM11 RM4,40 0
0 Merchandise
Nov. 18
100 units at RM12 RM1,20 Inventory
0 RM2,20 200 units at
1,000 units RM10,4
0 RM11
00 RM1,20 100 units at
0 RM12
RM3,40 300 units
0
 LIFO
LIFO Periodic
Periodic
200 units @ RM9 Jan. 1 Beginning
Inventory
300 units @ RM10 Mar. 10 Purchase

400 units @ RM11 Sept. 21 Purchase

100 units @ RM12 Nov. 18 Purchase

1,000 units lifo,
Using
Using available
lifo, the
the most
most recent
recent batch
batch
for sale during
purchased
purchased isis considered
considered the
the first
first
year
batch of merchandise sold.
batch of merchandise sold.
 LIFO
LIFO Periodic
Periodic
Jan. 1 Beginning
200 units @ RM9 Assume
Assume again that
Inventorythat
again
700
700 units
units were
were sold
sold
300 units @ RM10 Mar.during
10 Purchase
the
during the year.
year.
400 units @ RM11 Sept. 21 Purchase

100 units @ RM12 Nov. 18 Purchase

1,000 units available
for sale during
year
 Lifo
Lifo Periodic
Periodic
200 units @ RM9 =RM1,800 Jan. 1

Soldunits
100
300 200@ of RM10
these = 3,000
1,000 Mar. 10

400
Sold
units
these
@ RM11
400 = 4,4000 Sept. 21

100
Sold
units
these
@ RM12
100 = 1,2000 Nov. 18
1,000 units available RM10,400
RM2,800
for sale during
year Ending Inventory
 LIFO
LIFO Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale
RM10,400
RM10,400
Less
Less ending
ending inventory
inventory 2,800
2,800
Cost
Cost of
of merchandise
merchandise sold
sold RM
RM 7,600
7,600
 Summary
Summary of
of LIFO
LIFO Periodic
Periodic
Cost of
Merchandise Merchandise Sold
Available
Purchases for Sale RM1,80 200 units at RM9
RM1,80
0
Jan. 1 RM1,00
0 100 units at
200 units at RM9 RM1,80 0 RM10
0 RM2,80 300 units
Mar. 10 0
300 units at RM10 RM3,00 Cost of
0 Merchandise
Sep. 21 Sold
400 units at RM11 RM4,40
RM2,00 200 units at
0
Nov. 18 0 RM10
100 units at RM12 RM1,20
RM4,40 400 units at
0
RM10,4 0 RM11
1,000 units RM1,20 100 units at
00
0 RM12
RM7,60 700 units
0
 Average
Average Cost
Cost Periodic
Periodic

200 units @ RM9 Jan. 1 Beginning

The
The average
average cost
cost periodic
periodic
Inventory
method
method isis based
based on
on the
the
300 units @ RM10 Mar. 10 Purchase
average
average cost
cost ofof identical
identical
400 units @ RM11units.
units.
Sept. 21 Purchase

100 units @ RM12 Nov. 18 Purchase

1,000 units available
for sale during
year
 Average
Average Cost
Cost Periodic
Periodic
200 units @ RM9 = RM 1,800

300 units @ RM10 = RM 3,000

400 units @ RM11 = RM 4,400

100 units @ RM11 = RM 1,200

1,000 units available RM10,400 Cost of

for sale during merchandise
year available for
sale
 Average
Average Cost
Cost Periodic
Periodic
Cost of Merchandise
Available for Sale
= Average Unit Cost
Units Available for Sale
During Year

RM10,400
= RM10.40 per Unit
1,000 Units
 Average
Average Cost
Cost Periodic
Periodic

Cost
Cost of
of merchandise
merchandise available
available for
for sale
sale
RM10,400
RM10,400
Less
Less ending
ending inventory
inventory (RM10.40
(RM10.40 xx 300)
300) 3,120
3,120
Cost of
of merchandise
CostTo merchandise sold
sold RM
RM 7,280
7,280
verify this
amount, multiply
700 units sold
times RM10.40 to
get the same
RM7,280.
NEXT IN TOPIC 9 AND TOPIC 10