Chapter 13: Accounting for Merchandise Inventory

Merchandise Inventory

The goods that a business has available for sale

Current Asset

Assets that a company expects to use within one year or its operating cycle.

Examples: Cash, Accounts Receivable, Inventory, Prepaid Expenses

Importance? Liquidity

Liquidity

Measures how quickly and easy a company can convert assets to cash to meet its short-term obligations.

Effect of Inventory Errors

Incorrect Financial Statements

Remember:

Understating = Value to low = False Claims

Overstating = Value to high = False Claims

Correct Stating = Right Value = Being Real

Periodic Inventory System (doesn’t do much)

A business does not tract inventory continuously. It calculates monthly, quarterly, and yearly. Easier but lacks in responding to changes.

Perpetual Inventory System (does too much)

A business continuously updates inventory records. Records every sale and inventory. More accurate and complex.