ACC 250 Study Guide - Fall 2018, Comprehensive Midterm Notes - Accounting, Income Statement, Current Asset

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12 Oct 2018
Department
Course
ACC 250
MIDTERM EXAM
STUDY GUIDE
Fall 2018
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Merchandise Inventory
Businesses that buy goods for the purpose of selling them at a profit are dealing in
merchandise. The quantity of merchandise on hand is known as merchandise inventory or
stock in trade.
The type of merchandise included in inventory varies from business to business. For
instance, the merchandise inventory of a lumber company consists of various types and
sizes of wood products. The merchandise inventory of a good retailer consists of a variety of
food commodities. The merchandise inventory of an automobile dealer consists of new and
used cars as well as replacement parts.
Periodic Inventory System
Over the years, accounting for inventory has been done most commonly by the periodic
system. It has been the popular choice because it is inexpensive. The periodic inventory
system is one in which the cost of the inventory sold is determined only at the end of each
fiscal period. This usually means once a year. Businesses that use this method do not keep
up to date inventory records nor do they calculate the cost of goods sold between
statement dates.
Another system, the perpetual inventory system, has become more common in recent years
because of the increased use of computers in business.
The Inventory Cycle
Merchandise is generally sold fairly quickly in a successful business. The business has to
renew its stock regularly in order to have sufficient quantities on hand. Merchandise moves
in and out of the business in a regular pattern, as shown in the following steps.
1. There is inventory at the beginning of the accounting period
2. Merchandise is sold and moves out more or less continually during the accounting period.
3. Merchandise is replacing by the purchase of new stock from time to time
4. The inventory at the end of the accounting period s more or less the same as at the
beginning
Merchandise Inventory and the Financial Statements
When the periodic inventory system is used, no effort is made during the fiscal period to
find out either the figure for the cost of the goods sold or the figure for the goods on hand.
This creates a problem at statement time because the statements cannot be prepared
without these two figures.
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Physical Inventory
When the periodic inventory system is used, it is necessary at statement time to take a
physical inventory. A physical inventory is a procedure by which the unsold goods of a
merchandising business are counted and valued. This ending inventory figure is significant in
three respects:
1. It is an important current asset on the balance sheet
2. It is needed to calculate the cost of goods sold figure for the income statement
3. It will be used as the beginning inventory figure for the next accounting period
Merchandise Inventory on the Balance Sheet
A merchandising business buys goods to sell to its customers. Therefore, it keeps a stock of
goods on hand. This inventory of goods usually has a large dollar value and must be included
as an asset on the balance sheet. Merchandise inventory is listed as a current asset because
it will normally be sold and converted into cash within one year. It is listed at its cost price,
and not its selling price, in accordance with the cost principle.
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