Financial Accounting: An Integrated Statements Approach, 2nd Edition

An example of using computers in maintaining perpetual inventory records for re-

tail stores is described below.

1. The relevant details for each inventory item, such as a description, quantity, and
   unit size, are stored in an inventory record. The individual inventory records make
   up the computerized inventory file, the total of which agrees with the balance of
   the inventory ledger account.


2. Each time an item is purchased or returned by a customer, the inventory data are
   entered into the computer’s inventory records and files.


3. Each time an item is sold, a salesclerk scans the item’s bar code with an optical
   scanner. The scanner reads the magnetic code and rings up the sale on the cash
   register. The inventory records and files are then updated for the cost of goods
   sold. For example, Best Buy,Wal-Mart,Target,Sears, and other retailers use bar
   code scanners to update inventory records and sales.


4. After a physical inventory is taken, the inventory count data are entered into the
   computer. These data are compared with the current balances, and a listing of
   the overages and shortages is printed. The inventory balances are then adjusted to
   the quantities determined by the physical count.

Such systems can be extended to aid managers in controlling and managing in-

ventory quantities. For example, items that are selling fast can be reordered before the

stock is depleted. Past sales patterns can be analyzed to determine when to mark down

merchandise for sales and when to restock seasonal merchandise. In addition, such

systems can provide managers with data for developing and fine-tuning their market-

ing strategies. For example, such data can be used to evaluate the effectiveness of ad-

vertising campaigns and sales promotions.

INVENTORY COSTING METHODS UNDER

A PERIODIC INVENTORY SYSTEM

When the periodic inventory system is used, only revenue is recorded each time a sale

is made. No entry is made at the time of the sale to record the cost of the merchandise

sold. At the end of the accounting period, a physical inventory is taken to determine

the cost of the inventory and the cost of the merchandise sold. Like the perpetual in-

ventory system, a cost flow assumption must be made when identical units are ac-

quired at different unit costs during a period. In such cases, the fifo, lifo, or average

cost method is used.

First-In, First-Out Method

To illustrate the use of the fifo method in a periodic inventory system, we assume the

following data:

Jan. 1 Inventory: 200 units at $ 9 $ 1,800

Mar. 10 Purchase: 300 units at 10 3,000

Sept. 21 Purchase: 400 units at 11 4,400

Nov. 18 Purchase: 100 units at 12 1,200

Available for sale during year 1,000 $10,400

274 Chapter 6 Inventories

Determine the cost of in-

ventory under the periodic

inventory system, using the

first-in, first-out; last-in, first-

out; and average cost

methods.

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