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Lecture 3

COMMERCE 1AA3 Lecture Notes - Lecture 3: Gross Profit, Regional Policy Of The European Union, Income Statement


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Lecture
3

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Chapter 5: Inventory and Cost of Goods Sold
Learning Objective 1: account for inventory using the perpetual and periodic inventory
systems
Merchandising and Manufacturing vs Service
1. Merchandising and Manufacturing
o Sales revenue
o Cost of goods sold
o Gross profit
o Operating expenses
2. Service
o Service revenue
o Operating expenses
Sales Revenues in Merchandising Firms
Sales revenue is reduced by (contra-revenues accounts)
o Credit card discounts
o Sales returns and allowances
o Sales discounts (cash discounts): discounts given to customers to encourage
early payment
On the income statement
Income Statement for a Merchandising Firm

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Inventory
Inventory is an asset held for resale or used to produce services and goods for sale.
Merchandising firms have only merchandise inventory
Manufacturing firms have three types of inventory:
o Raw materials
o Work in process
o Finished goods
Costs Included in Inventory
The cost principle requires that inventory be recorded at the price paid plus all costs
incurred to bring the inventory to saleable conditions
o Invoice price
o Freight and insurance
o Inspection costs
o Preparation costs
Purchases Returns and Allowances
When customers are sold damaged merchandise, they can either:
o Return the merchandise and receive a full refund: sales returns
o Keep the merchandise, but receive some credit (either reduction in A/R, store
credit, or cash): sales allowances
Inventory Quantities
Take physical count
As of the end of the accounting period determine what’s included in inventory
o Ownership of goods in transit
F.O.B Shipping point
F.O.B Destination
o Consigned goods
Inventory Systems: Perpetual
Used for all types of goods
Keeps a running record of all goods bought, sold, and on hand.
Inventory counted at least once a year
Detailed records of the cost of each inventory purchase and sale are maintained
Cost of goods sold determined and inventory account updated each time a sale occurs
Provides better control over inventory
Inventory Systems: Periodic
Used for inexpensive goods
Does not keep a running record of all goods bought, sold, and on hand.

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Inventory counted at least once a year
Detailed records are not kept throughout the period
Cost of goods sold determined and inventory account updated only at the end of the
accounting period, when a physical inventory count is taken. An adjusting entry is
required.
Accounting for Purchases of Inventory
Periodic:
Purchases
Cash or A/P
Perpetual:
Inventory
Cash or A/P
Accounting for Returns of Inventory
Periodic:
Cash or A/P
Purchase R&A
Perpetual:
Cash or A/P
Inventory
Accounting for Sales of Inventory
Periodic:
Cash or A/R
Sales Revenue
Perpetual:
Cash or A/R
Sales Revenue
Cost of goods sold
Inventory
Accounting for Payment for Shipping
Periodic:
By Seller
Freight out
Cash
By Buyer
Freight in
Cash
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