Question

Merchandising companies need to have inventory available to sell to the consumer, creating a need to identify how to account for the purchase and sales of the inventory. In addition, there are costs associated with having inventory. You have been asked to propose an inventory system to handle the accounting for the purchasing and selling of merchandise. The company needs to also understand how to handle the accounting for the costs of inventory. PLEASE PROPOSE AN INVENTORY SYSTEM FOR PURCHASING AND SELLING OF INVENTORY AND TO FIND THE DIFFERENCES UNDER IFRS AND GAAP. ALSO EXPLAIN THE SELECTION AND HOW IT WILL EFFECT THE ACCOUNTING COST FOR INVENTORY.

Answer 1

Merchandise inventory is the cost of goods on hand and available for sale at any given time. Merchandise inventory (also called Inventory) is a current asset with a normal debit balance meaning a debit will increase and a credit will decrease.

To determine the cost of goods sold in any accounting period, management needs inventory information. Management must know:

its cost of goods on hand at the start of the period (beginning inventory)

the net cost of purchases during the period

and the cost of goods on hand at the close of the period (ending inventory).

Since the ending inventory of the one period is the beginning inventory for the next period, management already knows the cost of the beginning inventory. Companies record purchases, purchase discounts, purchase returns and allowances, and transportation-in throughout the period. Therefore, management needs to determine only the cost of the ending inventory at the end of the period in order to calculate cost of goods sold.

Cost of goods sold is the inventory cost to the seller of the goods sold to customers. Cost of Goods Sold is an EXPENSE item with a normal debit balance (debit to increase and credit to decrease). Even though we do not see the word Expense this in fact is an expense item found on the Income Statement as a reduction to Revenue.  

Accountants must have accurate merchandise inventory figures to calculate cost of goods sold. Accountants use two basic methods for determining the amount of merchandise inventory—perpetual inventory procedure and periodic inventory procedure.