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Chapter 6

COMMERCE 1AA3 Chapter Notes - Chapter 6: Inventory Turnover, Fifo (Computing And Electronics), Gross Margin

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Emad Mohammad

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Chapter 6
Perpetual Inventory System: maintains a continuous record for each inventory item
- Often used by a business that sells relatively fewer number of goods at a higher price
per unit
- Both purchases and sales of inventory are recorded directly to the inventory account
- Quatit ad ost of ieto a e deteied fo ieto eods… atual
physical count must be made at least once a year
- Perpetual records give up-to-the-minute data about inventory, enabling managers to
make decisions about when and how much to buy
- Two entries required to record sale of inventory
o Accounts Receivable/Cash XXX
o Sales Revenue XXX
o Cost of Goods Sold XXX
o Inventory XXX
Periodic Inventory System: does not keep a continuous record of the inventory on hand
- often used by businesses that sell a large number of goods at a low unit price
- purchases are recorded in the purchases account (an expense)
- Physical count of inventory is made at the end of period
- Only one entry required to record sale of inventory
o Accounts Receivable XXX
o Sales Revenue XXX
Freight-In: the transportation cost paid by the buyer to move goods from the seller to the
buyer, and is included in the cost of inventory
Purchase Discounts and Purchase Returns and Allowances both affect the amount of inventory
- Purchase discounts decrease the cost of purchases; these result from making prompt
payment on purchased goods and receiving a cash discount from the vendor for the
prompt payment
- Purchase returns and allowances both also decrease the cost of purchases
o Purchase returns results from buyers returning the goods
o Purchase allowances result from the seller granting the buyer an allowance from
the amount owed
- Net Purchases = Purchases + Freight-In Purchase Returns and Allowances Purchase
- Net Sales = Sales Revenue Sales Return and Allowances Sales Discounts
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