; Chapter 6 Merchandise Inventory and Cost of Goods Sold
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Chapter 6 Merchandise Inventory and Cost of Goods Sold

VIEWS: 25 PAGES: 33

  • pg 1
									INVENTORY AND
COST OF GOODS SOLD
Chapter Six
                      Types of Inventory
   MERCHANDISING                     MANUFACTURING
       Wholesalers                     Buy from several
         Buy from manufacturers         suppliers to make a
         sell to retailer               product
       Retailers                       Sell to wholesalers and
         Buy from wholesalers           sometimes retailers
         Sell to general public

                                       Acctg 102
        Acctg      101                 Raw Materials
   Merchandise Inventory               Work in Process
                                        Finished Goods
        Inventory Normal Balance
   Inventory is an asset so its normal balance is a
    Debit.
   To increase inventory – Debit
   To decrease inventory – Credit
        Purchases Normal Balance
   Purchases is like expense
   Purchases is always increased with a debit
   Purchase returns and allowances – credit balance
   Purchase discount – credit balance
       Cost of Goods Sold (COGS)
   Cost of Goods Sold is an expense so it has a debit
    balance
Gross Margin
   Sales
   -Sales Return and Allowances
   -Sales Discount
   =Net Sales
   -Cost of Goods Sold
   =Gross Margin
             Cost of Goods Sold
   Beginning Inventory                       3000
     +Purchases                  12000
     -Purchase Discount            -600
     -Purchases Return and Allow   -400
   + Net Purchases               11000
   + Freight In                    1000
   =Cost of Merchandise Purchased           10000
   =Goods Available for Sale                13000
   - Ending Inventory (or Goods not Sold)    -4000
   = Cost of Goods Sold                       9000
   Brief Exercise 6-3 page 281
   Exercise 6-1 page 283

   MUST KNOW THIS FORMULA

   MEMORIZE IT
    Estimating Inventory-Why important

   Sales                                              150,000
   Beginning Inventory                      8,000
     +Purchases             110,000
     -Purchase Discount      (1,000)
     -Purchases Ret & Allow   (2,000)
   + Net Purchases                          107,000
   Goods Available for Sale                 115,000
   - Ending Inventory (or Goods not Sold)    15,000
   = Cost of Goods Sold                               100,000
   Gross Margin                                        50,000
        Overstating/Understating
           Ending Inventory
                      Over      Under
 SALES                150       150
 Beg Inventory

 + Net Purchases        Can’t Change
 =Goods Available     115        115
 - Ending Inventory    20         10
 = COGS                95        105
 =Gross Margin         55         45
WHAT EVER I DO TO
ENDING INVENTORY,
 I ALSO DO TO NET
INCOME
Two methods to TRACK inventory
   Periodic
     At    some period of time


   Perpetual
     Allthe time--- everytime there is a purchase and
      everytime there is a sale
IF YOU KNOW PERIODIC


YOU WILL KNOW PERPETUAL

SO LETS DO PERIODIC


FIRST
     4 METHODS TO DETERMINE COST
        OF ENDING INVENTORY
   Specific Indentification
   First in First Out
   Last In First Out
   Average Cost
          Specific Indentification
   Not estimated
   Actual items
   Or specific identification
   Page 252 example
                 First In First Out
   GUMBALL MACHINE
   Physical Flow matches Cost Flow
   First one purchased is first one sold
   Page 252
   Used if few inventory items
   BE 6-4 page 281
   Increasing costs --- higher cost in Ending Inventory
   Lower cost in COGS so higher net income
                Last In First Out
   COOKIE JAR

   Last one purchased first one sold
   Page 253
   Used if want to put replacement cost in Cost of Goods
    sold
   Increasing costs --- higher cost in COGS
   Lower cost in Ending Inventory so lower net income
   BE 6-5 pg 281
   IFRS – Not used US – tax savings
                    LIFO RESERVE
   Additional amount of inventory a company would
    report if it used FIFO instead of LIFO

     Cost   of Goods Sold
             Inventory
            MUST BE CONSISTENT


   Can’t change inventory methods without IRS
    approval.
   Can use different type of methods for different
    types of inventory
                  Average Cost
   Weighted Average 500@$10, 600@$11,
    800@$12
   $50+$66+$96= 212/19 = $11.16
   Used if a lot of little inventory items
   BE 6-6 page 281
   Costs are evenly distributed in COGS and Ending
    Inventory
          Periodic versus Perpetual
   Have been using Periodic
   Perpetual uses the periodic method every time there
    is a sale and every time there is a sale.
   Perpetual needs exact dates it was purchased and
    sold.
Perpetual Tracking pg 272
   FIFO
     Usually   not different under perpetual and periodic


   LIFO
     Usually   different than periodic



   Exercise 6-15 pg 286
    Recording inventory transactions
                                Periodic Method
   Purchase
          Purchase
             A/P
   Sale
          A/R
                Sales
   Return & Allowance
          A/P
             Purchase Ret and Allowance
   Purchase Discount
          A/P
                Cash
                Purchase Discount
                                Perpetual Method
   Purchase
          Inventory
              A/P
   Sale
          A/R
            Sales
          COGS
            Inventory
   Return & Allowance
          A/P
             Inventory
   Purchase Discount
          A/P
                Cash
                Inventory
Periodic                                   Perpetual
   Purchase                                  Purchase
          Purchase                                      Inventory
             A/P                                            A/P

   Sale                                      Sale
                                                         A/R
          A/R
                                                           Sales
                Sales
                                                         COGS
   Return & Allowance                                     Inventory
          A/P                                Return & Allowance
             Purchase Ret and Allowance                 A/P
   Purchase Discount                                       Inventory
          A/P                                Purchase Discount
                Cash                                    A/P
                Purchase Discount                             Cash
                                                               Inventory
                   Freight - In
Freight In
  Purchases or COGS account
  Bringing it into the business

Freight In
     A/P

                     Freight out
   Selling Expense
   Cost of Sending it to the customer
       Freight Expense
            Cash or A/P
Exercises
   6-6 pg 284   Perpetual
   6-7          Periodic
Lower Cost or Market pg 266
   Normally Inventory is replacement cost --- cost to
    restock the item after identical items are sold

   If Market Value is less than Cost (if what you paid
    for the item is less than you can sell it for) you must
    make an adjustment.
                    COGS
                         Inventory
Exercises
   Page 285
   6-11
   6-12
Inventory Ratios

   Inventory Turnover pg 269
         COGS/ Average Inventory
   # of Days in Inventory
           365/ Inventory T/O   (Seasons)
6-13 pg 285 Inventory
Gross Profit Ratio

Gross Profit pg 271
            Gross Profit/ Net Sales

Exercise 6-14 pg 286
Homework
   Problem 6-2   COGS, Ending Inventory
   Problem 6-3   Periodic
   Problem 6-4   Perpetual
   Problem 6-6   Lower of Cost or Market
   Problem 6-8   Ratios

								
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