Download Merchandise Inventory, Cost of Goods Sold, and Gross Profit Pr

Merchandise Inventory, Cost of
Goods Sold, and Gross Profit
Pr. Zoubida SAMLAL
1
Accounting for Inventory
Inventory
(balance sheet)
Number of units of
inventory on hand
X
Cost per unit
of inventory
Cost of Goods Sold
Number of units of
=
(income statement)
inventory sold
X
Cost per unit
of inventory
=
Recording Transactions and the
T-Accounts
Date
General Journal
Accounts and Explanations
PR
Inventory
Debit
560,000
Credit
Accounts Payable
Purchased inventory on account
Inventory
Beg. 100,000
560,000
560,000
Accounts Payable
560,000
Recording Transactions
and the T-Accounts
Sale on account $900,000 of Inventory which
cost $540,000:
Date
General Journal
Accounts and Explanations
PR
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
Debit
900,000
Credit
900,000
540,000
540,000
Recording Transactions
and the T-Accounts
Inventory
Beg. 100,000 540,000
560,000
120,000
Cost of Goods Sold
540,000
Reporting in the
Financial Statements
Income Statement (partial)
Sales revenue
$900,000
Cost of goods sold
540,000
Gross profit
$360,000
Ending Balance Sheet (partial)
Current assets:
Cash
$ XXX
Short-term investments
XXX
Accounts receivable, net
XXX
Inventory
120,000
Prepaid expenses
XXX
Income Statements
Service Company
Century 21 Real Estate
Income Statement
Year Ended December 31, 20xx
Service revenue
Expenses
Salary expense
Depreciation expense
Income tax expense
Net income
$XXX
X
X
X
$
X
Merchandising Company
General Motors Corporation
Income Statement
Year Ended December 31, 20xx
Sales revenue
Cost of goods sold
Gross profit
Operating expenses:
Salary expense
Depreciation expense
Income tax expense
Net income
$185
146
39
X
X
$ X
$ 4
Balance Sheets
Service Company
Century 21 Real Estate
Balance Sheet
Year Ended December 31, 20xx
Current assets:
Cash
Short-term investments
Accounts receivable, net
Prepaid expenses
$X
X
X
X
Merchandising Company
General Motors Corporation
Balance Sheet
Year Ended December 31, 20xx
Current assets:
Cash
Short-term investments
Accounts receivable, net
Inventory
Prepaid expenses
©2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren
$X
X
X
11
X
Gross Profit (Gross Margin)
Sales Revenue
- Gross Profit
- Operating Expenses
Net Income
9
Learning Objective 1
Account for inventory transactions.
10
Inventory Accounting Systems
• Periodic systems do not keep a continuous
record of inventory on hand.
• Perpetual systems maintain a running record
to show the inventory on hand at all times.
11
Recording Transactions
in the Perpetual System
Purchase price of the inventory
+ Freight-in
– Purchase returns
– Purchase allowances
– Purchase discounts
= Net purchases of inventory
$600,000
4,000
– 25,000
– 5,000
– 14,000
$560,000
12
Recording Transactions
and the T-Accounts
Date
General Journal
Accounts and Explanations
PR
Inventory
Debit
560,000
Accounts Payable
Purchased inventory on account
Inventory
Beg. 100,000
560,000
Credit
560,000
Accounts Payable
560,000
Recording Transactions
and the T-Accounts
Sale on account $900,000 (cost $540,000):
Date
General Journal
Accounts and Explanations
PR
Accounts Receivable
Sales Revenue
Cost of Goods Sold
Inventory
Debit
900,000
Credit
900,000
540,000
540,000
Recording Transactions
and the T-Accounts
Inventory
Beg. 100,000 540,000
560,000
120,000
Cost of Goods Sold
540,000
15
Reporting in the
Financial Statements
Income Statement (partial)
Sales revenue
$900,000
Cost of goods sold
540,000
Gross profit
$360,000
Ending Balance Sheet (partial)
Current assets:
Cash
$ XXX
Short-term investments
XXX
Accounts receivable, net
XXX
Inventory
120,000
Prepaid expenses
XXX
16
Reporting in the
Financial Statements
Net purchases
Purchases
+ Freight-in
– Purchase returns & allowances
– Purchases discount
Net sales
Sales revenue
– Sales returns & allowances
– Sales discounts
17
Learning Objective 2
Analyze the various inventory methods.
18
What Goes Into Inventory Cost?
• Sum of all costs incurred to bring asset to its
intended use
• Inventory costing methods:
– Specific unit cost
– Weighted-average cost
– First-in, first-out (FIFO)
– Last-in, first-out (LIFO)
19
Illustrative Data
Beginning inventory (10 units @ $10)
No. 1 (25 units @ $14 per unit)
No. 2 (25 units @ $18 per unit)
Total purchases
Cost of goods available for sale
Ending inventory:
Cost of goods sold:
$ 100
$350
450
800
$ 900
20 units
40 units
20
Specific Unit Cost
5 Units @ $10
Cost of Goods Sold
$ 50
350
180
$580
25 Units @ $14
10 Units @ $18
$900 – $580 = $320
21
Weighted-Average
$900 total cost ÷ 60 units = $15/unit
Ending inventory = 20 × $15 = $300
Cost of goods sold = 40 × $15 = $600
22
First-In, First-Out
Ending Inventory Cost:
Less units sold
Ending inventory
60 units
40
20 units
20 units × $18 per unit = $360
23
First-In, First-Out
10 Units @ $10
Cost of Goods Sold
$100
350
90
$540
25 Units @ $14
5 Units @ $18
24
Last-In, First-Out
Ending Inventory Cost:
Less units sold
Ending inventory
60 units
40
20 units
10 units × 10 = $100
10 units × 14 = 140
Total
$240
25
Last-In, First-Out
Cost of Goods Sold
$450
210
$660
25 Units @ $18
15 Units @ $14
26
Income Effects of
Inventory Methods
Assumed
Sales
Revenue
Specific unit cost
Weighted-average
FIFO
LIFO
$1,000
$1,000
$1,000
$1,000
Cost of
Goods
Sold
–
–
–
–
580
600
540
660
Gross
Profit
=
=
=
=
$420
$400
$460
$340
Learning Objective 3
Identify the income and the tax effects of the
inventory methods.
28
The Tax Advantage of LIFO
FIFO LIFO
Gross profit
$460
$340
Operating expenses
260
260
Income before taxes
$200
$ 80
Income tax expense (40%) $ 80
$ 32
The most attractive feature of LIFO is low
income tax payments when prices are
increasing.
29
Use of the Various
Inventory Methods
LIFO
31%
Average
20%
FIFO
46%
Other
3%
30
Comparison of Inventory
Methods
• FIFO produces inventory profits during periods
of inflation
• LIFO allows managers to manipulate net
income
• LIFO liquidation
31
Consistency Principle
• Use the same accounting methods and
procedures from one period to the next
• May change inventory methods, but must
disclose the effects of the change on net
income
32
Disclosure Principle
• Financial statements should report enough
information to enable an outsider to make
knowledgeable decisions about the company.
33
Conservatism
• The least favorable figures are presented in
the financial statements.
34
Lower-of-Cost-or-Market Rule
• Report inventory at the lower of its historical
cost or market (replacement) value
• If the replacement cost falls below its
historical cost, write down the value of the
inventory
35
Learning Objective 4
Use the gross profit percentage and inventory
turnover to evaluate business.
36
Using the Financial Statements
for Decision Making
Gross profit percentage
= Gross profit
÷ Net sales revenue
Inventory turnover
= Cost of goods sold
÷ Average inventory
37
Learning Objective 5
Estimate inventory by the gross profit method.
38
Estimating Inventory
Gross profit method - based on computation of
cost-of-goods-sold
+
=
–==
Beginning inventory
Purchases
Cost of goods available for sale
Cost ofinventory
goods sold
Ending
Cost
of goods
sold
Ending
inventory
39
Objective 6
Show how inventory errors affect cost of goods
sold and income.
40
Effects of Inventory Errors
• An error in the ending inventory creates errors
for cost of goods sold and gross profit.
• The current year’s ending inventory is next
year’s beginning inventory.
41
Reporting Inventory Transactions on
the Statement of Cash Flows
• Inventory transactions are operating activities
• The purchase of inventory requires a cash
payment, and the sale a cash receipt
42