CHAPTER ONE

ACCOUNTING FOR INVENTORIES

1.1 Introduction
In the last section of Principles of Accounting I, you have learned about the principles and
practices of accounting for receivables – one of the current asset items in the balance sheet of a
retail business. In this unit, you will learn and discuss the concepts in accounting for inventories.
Inventories are asset items held for sale in the ordinary course of business or goods that will be
used or consumed in the production of goods to be sold. They are mainly divided into two major:
 Inventories of merchandising businesses
 Inventories of manufacturing businesses
i. Inventories of merchandising businesses are merchandise purchased for resale in the
normal course of business. These types of inventories are called merchandise inventories.
ii. Inventories of manufacturing businesses are businesses that produce physical output.
They normally have three types of inventories. These are: Raw material inventory, Work
in process inventory, finished goods inventory.
 Raw material inventory -is the cost assigned to goods and materials on hand but not
yet placed into production. Raw materials include the wood to make a chair or
other office furniture’s, the steel to make a car etc.
 Work in process inventory- is the cost of raw material on which production has been
started but not completed, plus the direct labor cost applied specifically to this
material and allocated manufacturing overhead costs.
 Finished goods inventory- is the cost identified with the completed but unsold units
on hand at the end of each period.
In this unit, accounting for inventory of merchandise purchased for resale commonly called
merchandise inventory will be discussed.
Importance of Inventories
Merchandise purchased and sold is the most active elements in merchandising business, i.e. in
wholesale and retail type of businesses. This is due to the following reasons:
 The sale of merchandise is the principal source of revenue for them.
 The cost of merchandise sold is the largest deductions from sales.
 Inventories (ending inventories) are the largest of the current assets or those firms.
Because of the above reasons, inventories have effects on the current and the following period’s
financial statements. If inventories are misstated (understated of overstated), the financial
statements will be distorted.
1.2. The effect of inventory errors on the financial statements
 Errors occasionally occur in taking or costing of inventory.
 Errors may be caused by failure to count or price the inventory correctly.
 Errors also may occur because proper recognition is not given to the transfer of legal title
that is in transit. When errors occur, they affect both the balance sheet and income
statement.
1. Effect of ending inventory on current period’s financial statements
Ending inventory is the cost of merchandise on hand at the end of accounting period. Let us see
its effect on current period’s financial statements.
Income statement

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 Cost of goods (merchandise) sold =Beginning inventory + Net purchase – Ending inventory
From the formula, ending inventory is a deduction in calculation cost of merchandise sold. So, it
has an indirect (negative) relationship to cost of merchandise sold, i.e. if ending inventory is
understated, the cost of merchandise sold will be overstated, and if ending inventory is
overstated, the cost of merchandise sold will be understated.
Gross Profit = Net sales – Cost of merchandise sold
Here, the cost of merchandise sold had indirect relationship to gross profit. So, the effect of
ending inventory on gross profit is the opposite of the effect on cost of merchandise sold. That is,
if ending inventory is understated, the gross profit will be understated and if ending inventory is
overstated, the gross profit will be overstated. This is a direct (positive) relationship.
Operating income = Gross Profit – Operating Expenses
Gross profit and operating income have direct relationships. Thus, the effect of ending inventory
on net income is the same as its effect on gross profit, i.e. direct (positive) effect (relationship).
Balance Sheet
Current assets - Ending inventory is part of current assets, even the largest. So, it has a direct
(positive) relationship to current assets. If ending inventory balance is understated (overstated),
the total current assets will be understated (overstated). Since current assets are part of total
assets, ending inventory has direct relationship to total assets.
Liabilities- Inventory misstatement has no effect on liabilities.
Owners’ equity – The net income will be transferred to the owners’ equity at the end of
accounting period. Closing income summary account does this. So, net income has direct
relationship with owners’ equity at the end of accounting period. The effect-ending inventory on
owners’ equity is the same as its effect on net income, i.e. if ending inventory is understated
(Overstated), the owners’ equity will be understated (overstated). i.e. positive relationship.

2. Effect of ending inventory on the following period’s financial statements

The ending inventory of the current period will become the beginning inventory for the
following period. So, it will have the same effect as beginning inventory of the current period.
Let us summarize it.
Income statement of the following period
Cost of merchandise sold direct relationship
Gross profit indirect relationship
Net income indirect relationship
Balance sheet of the following period
The ending inventory of the current period will not have an effect on the following period’s
balance sheet items.
Illustration:
The effects of understatements and overstatements of merchandise inventory at the end of the
period are demonstrated in the following three sets of condensed income statements and balance
sheets
.
The first set of statements is based on a correct ending inventory of $30,000; the second set, on
an incorrect ending inventory of $22,000; and the third set, on an incorrect ending inventory of
$37,000. In all three cases, net sales are $200,000, merchandise available for sale is $140,000,
and expenses are $55,000.

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Income Statement for the Year Balance Sheet at End of Year
1. Inventory at end of period correctly stated at $30,000
Net sales … $200,000 Merchandise $30,000
inventory
CGS ------------ 110,000 Other assets ……… 80,000
Gross profit--- $90,000 Total …………… $110,000
Expenses --- 55,000 Liabilities………… $30,000
Net income $35,000 Owner’s equity …… 80,000
Total ……… $110,000
2. Inventory at end of period incorrectly stated at $22,000; (understated by $8,000).
Net sales------ $200,000 Merchandise $22,000
inventory
CGS--------- 118,000 Other assets ……… 80,000
Gross profit ----- $82,000 Total………………. $102,000
Expenses …… 55,000 Liabilities……… $30,000
Net income $27,000 Owner’s equity … 72,000
Total ……… $102,000
3. Inventory at end of period incorrectly stated at $37,000; (overstated by $7,000).
Net sales ------- $200,000 Merchandise $37,000
inventory
CGS--------- 103,000 Other assets … 80,000
Gross profit ------ $97,000 Total……………… $117,000
Expenses … 55,000 Liabilities…… $30,000
Net income $42,000 Owner’s equity …… 87,000
Total ……… $117,000

1.3. Inventory system

There are two principal systems of inventory accounting i.e. periodic and perpetual.
1. Periodic inventory system
Under this system there is no continuous record of merchandise inventory account. The
inventory balance remains the same throughout the accounting period, i.e. the beginning
inventory balance. This is because when goods are purchased, they are debited to the purchases
account rather than merchandise inventory account.
The revenue from sales is recorded each time a sale is made. No entry is made for the cost of
goods sold. So, physical inventory must be taken periodically to determine the cost of inventory
on hand and goods sold. The periodic inventory system is less costly to maintain than the
perpetual inventory system, but it gives management less information about the current status of
merchandise. This system is often used by retail enterprises that sell many kinds of low unit cost
merchandise such as groceries, drugstores, hardware etc. The journal entries to be prepared are:
At the time of purchase of merchandise:
Purchases XX at cost
Accounts payable or cash XX
At the time of sale of merchandise:
Accounts receivable or cash XX at retail price
Sales XX
To record purchase returns and allowance:

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 Accounts payable or cash XX
Purchase returns and allowance XX

To record adjusting entry or closing entry for merchandise inventory:

Income Summary XX
Merchandise inventory (beginning) XX
To close beginning inventory
Merchandise inventory (ending) XX
Income summary XX
To record ending inventory
1. Perpetual inventory system
Under this system, the accounting record continuously disclose the amount of inventory. So, the
inventory balance will not remain the same in the accounting period. All increases are debited to
merchandise inventory account and all decreases are credited to the same account. There are no
purchases and purchase returns and allowances accounts in this system. At the time of sale, the
cost of goods sold is recorded in addition to Journal entry for the sale. So, we can determine the
cost of inventory as well as goods sold from the accounting record. No need of physical counting
to determine their costs. Companies that sell items of high unit value, such as appliances or
automobiles, tended to use the perpetual inventory system.
Given the number and diversity of items contained in the merchandise inventory of most
businesses, the perpetual inventory system is usually more effective for keeping track of
quantities and ensuring optimal customer service. Management must choose the system or
combination of systems that is best for achieving the company's goal.
Journal entries to be prepared are:
At the time of purchase of merchandise
Merchandise inventory XX at cost
Accounts payable/cash XX

At the time of sale of merchandise

Accounts receivable or cash XX at retail price
Sales XX
To record the sales

Cost of goods sold XX

Merchandise inventory XX at cost
To record cost of goods sold
Accounts payable or cash XX
Merchandise inventory XX
To record purchase returns and allowances
No adjusting entry or closing entry for merchandise inventory is needed at the end
of each accounting period.

Illustration:
Suppose on January,1,2006; NILE-merchandising company had 120 units of
merchandises that cost Br. 8 per Unit. The following transactions were completed
during 2006.
February 5: Purchased on credit 150 units of at Br. 10 per unit

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 February 9: Returned 20 defective units from February 5 purchases to the supplier.
June 15: Purchased for cash 230 units of merchandise at Br. 9 per unit.
September 6: Sold 220 units for each at a price of Br. 15 per unit. These goods are 120
units from the beginning inventory and 100 units for February purchases.
December 31: 260 units are left on hand, 30 units from February 5 purchases.
Required:
Prepare general journal entries for NILE Company to record the above transactions and
adjusting or closing entry for merchandise inventory on December 31,2006

1.4. Inventory cost flow assumptions

One of the most important decisions in accounting for inventory is determining the per unit costs
assigned to inventory items. When all units are purchased at the same unit cost, this process is
simple since the same unit cost is applied to determine the cost of goods sold and ending
inventory. But when identical items are purchased at different costs, a question arises as to what
amounts are included in the cost of merchandise sold and what amounts remain in inventory.
There are four methods commonly used in assigning costs to inventory and cost of merchandise
sold. These are:
 Specific identification  Last-in first-out (LIFO)
 First-in first-out(FIFO)  Weighted average

1.5 Inventory Costing Methods under Perpetual & Periodic Inventory System
Inventory Costing Methods under Periodic Inventory System
A periodic inventory system determines cost of merchandise sold and inventory at the
end of the period. How we assign these costs to inventory and cost of merchandise sold
affects the reported amounts for both systems.
Let us see these costing methods under periodic inventory system based on the following
illustration
Illustration:
Smart Company began the year and purchased merchandise as follows:
Jan-1 Beginning inventory 80 units@ Br. 60 = Br. 4,800
Feb-2 Purchase 400 units@ 56 = 22,400
Sep-4 Purchase 160 units@ 50 = 8,000
Nov-20 Purchase 320 units@ 46 = 14,720
Dec-4 Purchase 240 units@ 40 = 9,600
Total 1,200 units Br.59, 520
a. Specific Identification Method: When each item in inventory can be directly identified with
a specific purchase and its invoice, we can use specific identification (also called specific
invoice pricing) to assign costs. This method is appropriate when the variety of merchandise
carried in stock is small and the volume of sales is relatively small. We can specifically
identify the items sold and the items on hand.
Example: From the above illustration, the ending inventory consists of 300 units, 100 from each
of the last purchases. So, the items on hand are specifically known from which purchases they
are: Cost of ending inventories under specific identification method:

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 Br. 40 x 100 = Br. 4,000
Br. 46 x 100 = 4,600
Br. 50 x 100 = 5,000
300units Br. 13,600
Cost of Ending inventory cost = Br. 13,600
The cost of merchandise sold = Cost of goods available for sale - Ending inventory
= Br. 59,520 – Br. 13,600
= Br. 45,920

b. First-in, First-out (FIFO): This method of assigning cost to inventory and the goods sold
assumes inventory items are sold in the order acquired. This means the cost flow is in the
order in which the expenditures were made. So, to determine the cost of ending inventory, we
have to start from the most recent purchase and continue to the next recent. Because the first
purchased items (old purchases) are the first to be sold they are used (included) in the
computation of cost of goods sold. Example, easily spoiled goods such as fruits, vegetables
etc., must be sold near the time of their acquisition. So, the inventory on hand will be from
the recent purchases. As an example, consider the previous illustration. The cost of ending
inventory under FIFO method:
Br. 40 x 240 = Br. 9,600
Br. 46 x 60 = 2,760
300 units Br. 12,360
Cost of Ending inventory = Br. 12,360
Cost of merchandise sold = Br. 59,520 – Br. 12,360
= Br. 47,160
c. Last-In First-Out (LIFO): This method of assigning cost assumes that the most recent
purchases are sold first. Their costs are charged to cost of goods sold, and the costs of the
earliest purchases are assigned to inventory.

Under IFRS, LIFO is not permitted for financial reporting purposes because the IASB
states it does not provide a reliable representation of actual inventory flow.

d. Weighted Average Method: This method of assigning cost requires computing the average
cost per unit of merchandise available for sale. That means the cost flow is an average of the

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 expenditures. To calculate the cost of ending inventory, we will calculate first the cost per
unit of goods available for sale.
Average cost per unit = Cost of goods available for sale
Total units available for sale
Then the weighted average unit cost is multiplied by units on hand at the end of the period to
calculate the cost of ending inventory. Also, the same average unit cost is applied in the
computation of cost of goods sold. From the above example,
Weighted average unit cost = Br. 59,520 = Br. 49.60
1,200
Ending inventory cost = Br. 49.60x 300 = Br. 14,880
Cost of merchandise sold = Br. 59,520-Br. 14,880
= Br. 44,640

Inventory Costing Methods under Perpetual Inventory System

Under perpetual inventory systems we will apply the inventory costing methods each time sale of
merchandise is made. We calculate the cost of goods (merchandise) sold and inventory on hand
at the time of each sale. This means the merchandise inventory account is continually updated to
reflect purchase and sales.

Illustration: The beginning inventory, purchases and sales of Pharma Company for the month
of December are as follows:
Dec Units Cost (in Birr)
1 Inventory 15 10
6 Sale 5 -
10 Purchase 10 12
20 Sale 8 -
25 Purchase 8 12.5
27 Sale 10 -
30 Purchase 15 14

1) First-in first-out Method

The assignment of costs to goods sold and inventory using FIFO is the same for both the
perpetual and periodic inventory systems; because each withdrawal of goods is from the oldest
stock on hand. The oldest is the same whether we use periodic inventory system or perpetual
inventory system.
Let us calculate the cost of goods sold and ending inventory under perpetual inventory system
from the above illustration.
Perpetual – FIFO
Date Purchase Cost of merchandise sold Inventory
Qty. UC TC Qty UC TC Qty UC TC
Dec. 1 15 10.00 150.00
6 5 10.00 50.00 10 10.00 100.00
10 10.00 100.00
10 10 12.00 120.00 10 12.00 120.00
20 8 10.00 80.00 2 10.00 20.00
10 12.00 120.00

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 2 10.00 20.00
25 8 12.50 100.00 10 12.00 120.00
8 12.50 120.00
27 2 10.00 20.00 2 12.00 24.00
8 12.00 96.00 8 12.50 100.00
2 12.00 24.00
30 15 14.00 210.00 8 12.50 100.00
15 14.00 210.00
23 246.00 25 334.00
 So, the cost of merchandise sold and ending inventory under perpetual- FIFO method are
Br. 246 and Br. 334 respectively.
Let us see them under Periodic - FIFO method:
Units on hand = units available for sale – units sold
= (15 + 10 + 8 + 15) – (5+ 8 + 10) = 48 - 23 = 25

Cost of ending inventory = Br. 14 x 15 = Br. 210

Br. 12.50 x 8 = 100
Br. 12 x 2 = 24
Br. 334
Cost of goods available for sale = Br. 120 + Br. 100 + Br. 210 = Br. 580
Cost of goods sold = Br. 580 – Br. 334 = Br 246
So, the same results of cost of gods sold and ending inventory under both inventory systems.
2) Weighted average cost method.
Under this method, the average unit cost is calculated each time purchased is made to be applied
on the sales made after the purchases. The results may be different under periodic and perpetual
inventory system. Let us calculate the cost of merchandise sold and ending inventory comes out
from the previous illustration under perpetual inventory system.
Average Cost Method (Moving Average)
Date Purchase Cost of merchandise sold Inventory
Qty UC TC Qty UC TC Qty UC TC
Dec.1 15 10.00 150.00
6 5 Br. 10.00 50.00 10 10.00 100.00
10 10 12.00 120.00 20 11.00* 220.00
20 8 11.00 88.00 12 11.00 132.00
25 8 12.00 100.00 20 11.60@ 232.00
27 10 11.60 116.00 10 11.60 116.00
30 15 14.00 210.00 15 13.04# 326.00
23 254.00 25 13.04 326.00

* 11 = (100+120) / (10+10)
@11.6 = (132+100) / (12+8)
#13.04 = (116+210) / (10+15)
So, the cost of goods sold and ending inventory under perpetual inventory system are Br. 254.00
and Br. 326.00, respectively. The results under periodic-average inventory system are:
Weighted average unit cost = Br. 580/48 = Br. 12.08
Ending inventory cost = Br. 12.08 x 25 = Br. 302
Cost of merchandise sold = Br. 580 – Br. 302 = Br. 278 so, the result is different under
periodic and perpetual inventory systems.

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 1.6 Valuation of inventory at other than cost (LCNRV)
Inventories are recorded at their cost. However, if inventory declines in value below its original
cost, a major departure from the historical cost principle occurs. Whatever the reason for a
decline—obsolescence, price-level changes, or damaged goods—a company should write down
the inventory to net realizable value to report this loss. A company abandons the historical cost
principle when the future utility (revenue-producing ability) of the asset drops below its
original cost.

Cost is the acquisition price of inventory computed using one of the historical cost-based
methods—specific identification, average-cost, or FIFO.
Net realizable value (NRV) is the net amount that a company expects to realize from the
sale of inventory. Specifically, net realizable value is the estimated selling price in the
normal course of business less estimated costs to complete and estimated costs to make a
sale.

To illustrate, assume that Mander Corp. has unfinished inventory with a cost of €950, a sales
value of €1,000, estimated cost of completion of €50, and estimated selling costs of €200.
Mander’s net realizable value is computed as follows.

Mander reports inventory on its statement of financial position at €750. In its income statement,
Mander reports a Loss on Inventory Write-Down of €200 (€950 - €750). A departure from cost is
justified because inventories should not be reported at amounts higher than their expected
realization from sale or use. In addition, a company like Mander should charge the loss of utility
against revenues in the period in which the loss occurs, not in the period of sale.

Companies therefore report their inventories at the lower-of-cost-or-net realizable value

(LCNRV) at each reporting date. Illustration below shows how two companies indicate
measurement at LCNRV.

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Illustration of LCNRV
As indicated, a company values inventory at LCNRV. A company estimates net realizable value
based on the most reliable evidence of the inventories’ realizable amounts (expected selling
price, expected costs of completion, and expected costs to sell). To illustrate, Jinn-Feng Foods
computes its inventory at LCNRV, as shown in the illustration below (amounts in thousands).

As indicated, the final inventory value of \384,000 equals the sum of the LCNRV for each of the
inventory items. That is, Jinn-Feng applies the LCNRV rule to each individual type of food.

1.7 Estimating Inventory Cost

In practice, an inventory amount is estimated for some purposes;
Example
 When it is impossible to take a physical inventory or to maintain perpetual inventory
records.
 When monthly income statements are needed. It may be too costly, to take physical
inventory. This is especially the case when periodic inventory system is used.
 When a catastrophe such as a fife has destroyed the inventory. In such case, to ask
claims from insurance companies it needs estimation of inventory.
To estimate the cost of inventory, two common methods are used. These are retail method and
gross profit method.

a. The Gross Profit Method of Estimating Inventory

Companies take a physical inventory to verify the accuracy of the perpetual inventory records or,
if no records exist, to arrive at an inventory amount. Sometimes, however, taking a physical
inventory is impractical. In such cases, companies use substitute measures to approximate
inventory on hand.

One substitute method of verifying or determining the inventory amount is the gross profit
method (also called the gross margin method). Auditors widely use this method in situations
where they need only an estimate of the company’s inventory (e.g., interim reports). Companies
also use this method when fire or other catastrophe destroys either inventory or inventory
records.

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This method uses an estimate of the gross profit realized during the period to estimate the cost of
inventory. The gross profit rate may be estimated based on the average of previous period’s gross
profit rates. The steps are as follows:

1. The gross profit rate is estimated and then estimated gross profit is calculated.
Estimated gross profit = Gross profit rate X Sales
2. Cost of merchandise sold is estimated
Estimated CGS = Net Sales - Estimated gross profit
3. Calculate the estimated cost of ending inventory
Estimated cost of ending inventory = CGAFS – Estimated CGS.
To illustrate, assume that Cetus Corp. has a beginning inventory of €60,000 and purchases of
€200,000, both at cost. Sales at selling price amount to €280,000. The gross profit on selling
price is 30 percent. Cetus applies the gross profit method as follows.

Computation of Gross Profit Percentage

In most situations, the gross profit percentage is stated as a percentage of selling price. The
previous illustration, for example, used a 30 percent gross profit on sales. Gross profit on selling
price is the common method for quoting the profit for several reasons.

An alternative method of estimating inventory using the gross profit percentage is considered by
some to be less complicated than the traditional method. This alternative method uses the
standard income statement format as follows. (Assume the same data as in the Cetus example
above.)

Compute the unknowns as follows: first the gross profit amount, then cost of goods sold, and
finally the ending inventory, as shown below.
(1) €280,000 * 30% = €84,000 (gross profit on sales).

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(2) €280,000 - €84,000 = €196,000 (cost of goods sold).
(3) €260,000 - €196,000 = €64,000 (ending inventory).

In Illustration above, the gross profit was a given. But how did Cetus derive that figure? To see
how to compute a gross profit percentage, assume that an article costs €15 and sells for €20, a
gross profit of €5. As shown in the computations in Illustration below, this markup is 1⁄4 or 25
percent of retail, and 1⁄3 or 331⁄3 percent of cost.

The gross profit method is normally unacceptable for financial reporting purposes because
it provides only an estimate.

IFRS requires a physical inventory as additional verification of the inventory indicated in the
records. Note that the gross profit method will follow closely the inventory method used (FIFO
or average-cost) because it relies on historical records.

b. RETAIL INVENTORY METHOD

Accounting for inventory in a retail operation presents several challenges. Retailers with certain
types of inventory may use the specific identification method to value their inventories. Such an
approach makes sense when a retailer holds significant individual inventory units, such as
automobiles, pianos, or fur coats. However, imagine attempting to use such an approach at high-
volume retailers and supermarkets that have many different types of merchandise. It would be
extremely difficult to determine the cost of each sale, to enter cost codes on the tickets, to change
the codes to reflect declines in value of the merchandise, to allocate costs such as transportation,
and so on.

An alternative is to compile the inventories at retail prices. For most retailers, an observable
pattern between cost and price exists. The retailer can then use a formula to convert retail prices
to cost. This method is called the retail inventory method. It requires that the retailer keep a
record of (1) the total cost and retail value of goods purchased, (2) the total cost and retail
value of the goods available for sale, and (3) the sales for the period. Use of the retail
inventory method is very common.
The steps to be followed are:
1. Calculate the cost to retail ratio
Cost to retail ratio = Cost of merchandise available for sale
Retail Price of GAFS
2. Calculate the ending inventory at retail price
Ending inventory at retail price = retail price of GAFS – Net Sales
3. Calculate the estimated cost of ending inventory
Estimated cost of ending inventory = Cost to retail ration X Ending inventory at retail

Here is how it works at a company like Debenham. Beginning with the retail value of the goods
available for sale, Debenham deducts the sales for the period. This calculation determines an
estimated inventory (goods on hand) at retail. It next computes the cost-to-retail ratio for all
goods. The formula for this computation is to divide the total goods available for sale at cost by

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the total goods available at retail price. Finally, to obtain ending inventory at cost, Debenham
applies the cost-to-retail ratio to the ending inventory valued at retail. Illustration below shows
the retail inventory method calculations for Debenham using assumed data.

The retail inventory method is particularly useful for any type of interim report because such
reports usually need a fairly quick and reliable measure of the inventory. Also, insurance
adjusters often use this method to estimate losses from fire, flood, or other type of casualty. This
method also acts as a control device because a company will have to explain any discrepancies
between the results of the retail method and a physical count at the end of the year. Finally, the
retail method expedites the physical inventory count at the end of the year. The crew taking the
physical inventory need record only the retail price of each item. The crew does not need to look
up each item’s invoice cost, thereby saving time and expense.

1.8 Presentation of Merchandise Inventory on the Balance Sheet

Merchandise inventory is usually presented in the Current Assets section of the balance sheet,
following receivables. Both the method of determining the cost of the inventory (fifo, or average)
and the method of valuing the inventory (cost or the LCNRV) should be shown. It is not unusual
for large businesses with varied activities to use different costing methods for different segments
of their inventories. The details may be disclosed in parentheses on the balance sheet or in a
footnote to the financial statements. Exhibit 8 shows how parentheses may be used.

A company may change its inventory costing methods for a valid reason. In such cases, the effect
of the change and the reason for the change should be disclosed in the financial statements for
the period in which the change occurred.

Partial Balance Sheet:

Milko Company
Balance Sheet
December 31, 2015
Asset
Current assets:
Cash $ 19,400
Accounts receivable $80,000
Less allowance for doubtful accounts 3,000 77,000
Merchandise inventory––at lower of cost (FIFO), or Market 216,300

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