216 Chapter 5 Accounting for Merchandise Operations
Q.If merchandise avail-
able for sale is
$1,375,000 and the cost
of merchandise sold is
$950,000, what is the
ending merchandise
inventory?A.$425,000
($1,375,000
$950,000)Merchandise inventory, January 1, 2010 $ 59,700
Purchases $521,980
Less: Purchases returns and allowances $9,100
Purchases discounts 2,525 11,625
Net purchases $510,355
Add transportation in 17,400
Cost of merchandise purchased 527,755
Merchandise available for sale $587,455
Less merchandise inventory, Dec. 31, 2010 62,150
Cost of merchandise sold $525,305Exhibit 4
Cost of Merchandise
SoldThe ending inventory of Online Solutions on December 31, 2009, $59,700, becomes
the beginning inventory for 2010. This beginning inventory is added to the cost of mer-
chandise purchased to yield merchandise available for sale. The ending inventory,
which is assumed to be $62,150, is then subtracted from the merchandise available for
sale to yield the cost of merchandise sold, as shown in Exhibit 4.Beginning
InventoryPurchasesMerchandise
Available for SaleMerchandise
Available
for SaleCost of
Goods SoldEnding
InventoryUnder the periodic method, the inventory records do not show the amount avail-
able for sale or the amount sold during the period. In contrast, under the perpetual
inventory methodof accounting for merchandise inventory, each purchase and sale of
merchandise is recorded in the inventory and the cost of merchandise sold accounts.
As a result, the amount of merchandise available for sale and the amount sold are
continuously (perpetually) disclosed in the inventory records.
Most large retailers and many small merchandising businesses use computerized
perpetual inventory systems. Such systems normally use bar codes, such as the one on
the back of this textbook. An optical scanner reads the bar code to record merchandise
purchased and sold. Merchandise businesses using a perpetual inventory system re-
port the cost of merchandise sold as a single line on the income statement, as shown
in Exhibit 3 for Online Solutions. Merchandise businesses using the periodic inventory
method report the cost of merchandise sold by using the format shown in Exhibit 4.The cost of merchandise sold was determined by deducting the merchandise on
hand at the end of the period from the merchandise available for sale during the period.
The merchandise on hand at the end of the period is determined by taking a physical
count of inventory on hand. This method of determining the cost of merchandise sold
and the amount of merchandise on hand is called the periodic inventory methodof ac-
counting for merchandise inventory. This flow of costs in the periodic inventory method
is illustrated below.