Class Notes (839,150)
Canada (511,218)
Commerce (1,911)
Lecture

Accounting - Chapter 8 Notes.docx

10 Pages
128 Views

Department
Commerce
Course Code
COMMERCE 1BA3
Professor
Emad Mohammad

This preview shows pages 1,2 and half of page 3. Sign up to view the full 10 pages of the document.
Description
CHAPTER 8: REPORTING AND INTERPRETING COST OF GOODS SOLD AND INVENTORY Merchandising and Manufacturing vs. Service  Merchandising and manufacturing (sell goods): o Sales revenue o Cost of goods sold o Gross profit o Operating expenses  Services (sell services): o Services revenue o Operating expenses Inventory  Inventory is an asset held for resale or used to produce goods/services for sale  Merchandising firms only have merchandise inventory  Manufacturing firms have three types of inventory: 1) Raw materials (buy for purpose of creating goods) 2) Work in process: o When raw materials are in process of becoming a finished good o Two costs: labour and overhead o Overhead: collection/accumulation of other costs besides labour 3) Finished goods Relationships between Inventories  Ending raw material inventory = beginning raw materials inventory + raw materials purchases – raw materials used  Ending work in process = beginning work in process + (direct labour + raw materials used + overhead) – cost of goods manufactured  Ending finished goods inventory = beginning finished goods inventory + cost of goods manufactured – cost of goods sold  (Do not need to know T-accounts – just names) Cost Included in Inventory Purchases  Cost principle requires that inventory be recorded at the price paid plus all costs incurred to bring inventory to saleable conditions  Includes: o Invoice price (purchase price and taxes) o Freight and insurance (transportation costs) o Inspection costs o Preparation costs (labour to assemble, packaging, engraving with company name/logo)  Shipping to customer is not part of inventory because it is already ready to be sold Inventory Systems Perpetual  Detailed records of cost of each inventory purchase and sale are maintained  Update inventory and COGS accounts every time purchase/sell a good  Credit inventory and debit COGS every time you sell  Provides better control over inventory  What type of firm would use a perpetual inventory system? Walmart, Fortinos, Lowes Periodic  Detailed records are not kept throughout period  Use temporary accounts called purchases  COGS determined and inventory account updated only at end of accounting period  Do a physical count at end of period  Adjusting entry is required  What type of firm would use a periodic inventory system? Something smaller would use this, private entities where it is easy to count inventory at the end of the year (ex. convenient store)  Purchases is a Temporary Expense account  Purchases is related to the Income statement  Determine inventory by: Beginning Inventory $500 + Cost of Goods Purchased (COGP) $1000 = Cost of goods available for sale (COGAS) $1500 – Ending Inventory $300 = COGS $1200  Errors determining COGS this way: o Assumes all missing inventory was sold o Not necessarily all of inventory was sold o Could have been stolen, damaged, returned but not recorded Differences Transaction Perpetual System Periodic System Purchase of Inventory Purchases Merchandise Cash or A/P Cash or A/P Return of damaged Cash or A/P Cash or A/P goods Inventory Purchases R&A Sale of Merchandise Cash or A/R Cash or A/R Sales Revenue Sales Revenue Cost of goods sold Inventory Payment for freight Freight out Freight out by seller Cash Cash Payment for freight Inventory Freight in by buyer Cash Cash  Purchase Returns and Allowances is a contra expense account  Freight out: o Operating expense o Affects Operating Income, Net Income, Retained Earnings  Freight in: o Dependent on a certain outcome o If you end up buying inventory and not selling it  Temporary Asset account o If you end up selling the inventory  Temporary Expense account o Affects Gross Profit, Operating Income, Net Income and Retained Earnings  Income Statement: Sales – COGS = Gross Profit – Operating Expenses = Operating Income  Difference between operating income and net income: operating income is EBIT (earnings before interest and taxes) Accounting for Purchase Discount Gross Method  Purchases and A/P are recorded at the gross amount  Assume discount will not be taken and when it is give the discount  Purchase discounts taken by customers are credited to Purchase Discounts account only when buyer pays within discount period  Better to assume discount will not be taken  If a company is not paying in time to take advantage of the discount it means that they have cash flow problems Net Method  Purchases and A/P are recorded at the net amount  Assume discount is taken and if do not receive discount take it away  Purchase discounts not taken by buyers are credited to Purchase Discounts Lost account Example On May 24 , 2013 Seller Inc. Sold to Buyer Inc. goods for $20,000 on credit with the following terms: (2/10, n/30). On June 2 , 2013, Buyer Inc. paid 60% of the invoice to Seller Inc. On June 22 2013 Buyer Inc. paid the balance of their account to Seller Inc. Prepare the journal entries for Buyer Inc. under the periodic and perpetual systems. Periodic System Gross Method Net Method May 24: May 24: Purchases 20,000 Total discount = 20,000 x 2% A/P 20,000 Net = 20,000 – 400 Purchases 19,600 *19,600 is A/P 19,600 98% of 20,000 June 2: June 2: Discount = 20,000 x 60% x 2% A/P 11,760 A/P 12,000 Cash 11,760 Cash 11,760 Purchase Discount 240 *Purchase June 22: June 22: Discount is a Balance of A/P = 20,000 x 40% Balance of A/P = 19,600 x 40% contra- expense A/P 8,000 = $7,840 Cash 8,000 Discount lost = 8,000 x 2% account A/P 7,840 P. Discount lost 160 Cash 8,000 Perpetual System Gross Method Net Method May 24: May 24: Inventory 20,000 Total discount = 20,000 x 2% A/P 20,000 Net = 20,000 – 400 Inventory 19,600 A/P 19,600 June 2: June 2: Discount = 20,000 x 60% x 2% A/P 11,760 A/P 12,000 Cash 11,760 Cash 11,760 Inventory 240 June 22: June 22: Balance of A/P = 20,000 x 40% Balance of A/P = 19,600 x 40% A/P 8,000 = $7,840 *Purchase Cash 8,000 Discount lost = 8,000 x 2% discount lost A/P 7,840 is a temporary P. Discount lost 160 Cash 8,000 adjunct expense Periodic System Adjusting Entries 1. Physical count of ending inventory 2. Calculate cost of goods purchased: Purchases – Purchase returns and allowances – Purchase discounts + Freight in 3. Calculate cost of goods available for sale: Beginning inventory + Cost of goods purchased 4. Calculate cost of goods sold: Cost of goods available for sale (from step 3) – Ending inventory (from step 1) 5. Prepare the following entry: Cost of goods sold xx Inventory (ending balance) xx Purchase returns and allowances xx Purchase discounts xx Inventory (beginning balance) xx Purchases xx Freight in xx Ex. As of January 1, 2006, ABC Inc. had $65,000 in merchandise inventory. The following transactions took place in 2006: Freight out $10,000 Purchases 40,000 Purchase returns and allowances 10,000 Purchase discounts 3,000 Freight in 5,000 Sales
More Less
Unlock Document

Only pages 1,2 and half of page 3 are available for preview. Some parts have been intentionally blurred.

Unlock Document
You're Reading a Preview

Unlock to view full version

Unlock Document

Log In


OR

Join OneClass

Access over 10 million pages of study
documents for 1.3 million courses.

Sign up

Join to view


OR

By registering, I agree to the Terms and Privacy Policies
Already have an account?
Just a few more details

So we can recommend you notes for your school.

Reset Password

Please enter below the email address you registered with and we will send you a link to reset your password.

Add your courses

Get notes from the top students in your class.


Submit