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Lecture Notes CH6.pdf

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McMaster University
Aadil Merali Juma

Instructors Resource Manual for Harrison et al Financial Accounting 5ceCHAPTER 6 Inventory and Cost of Goods Sold1 Account for inventory using the perpetual and periodic inventory systems 2 Explain and apply three inventory costing methods 3 Explain how accounting standards apply to inventory 4 Analyze and evaluate gross profit and inventory turnover 5 Use the costofgoodssold COGS model to make management decisions 6 Analyze how inventory errors affect the financial statements Copyright2015 Pearson Canada IncInstructors Resource Manual for Harrison et al Financial Accounting 5ce CHAPTER OUTLINEOBJECTIVE 1 Account for inventory using the perpetual and periodic inventory systemsAThe merchandising companys balance sheet includes a new current asset Inventory or Merchandise inventory While the companys income statement includes an expense Cost of Goods Sold or Cost of Sales Exhibit 61 contrasts the balance sheet and income statement of a service company versus a merchandiserCost of Goods Sold may be the first expense account that you have seen that does not have the word expense in its title BThe cost of inventory on hand is the Inventory reported as an asset on the balance sheet while the cost of inventory that has been sold is the Cost of Goods Sold reported as an expense on the income statementCExhibit 62 illustrates the difference between the sale price of inventory and the cost of inventoryDGross profit or gross margin is the excess of the sales revenue over the cost of goods soldAn item in your inventory had a cost of 108 Its sale price is 235 When the above two entries are made to record the sale what is the difference in the credit to Revenue and the debit to Cost of Goods Sold 127 the amount of gross margin on the sale Do we need to make an entry to record the 127 No Gross margin is a subtotal on the Income Statement not an accountEThe cost of inventory is the inventory quantity times the unit costF Inventory cost includes all costs incurred to bring the asset to its intended use All other costs such as advertising sales commissions and so on are not part of inventory cost but are listed among operating expenses on the income statementGTwo inventory accounting systems are used to maintain inventory records 1 the perpetual inventory system 2 the periodic inventory systemsa The perpetual inventory system often used by a business that sells relatively fewer numbers of goods at a higher price per unit maintains a continuous record for each inventory itemi Both purchases and sales of inventory items are recorded directly to the Inventory accountii The quantity and cost of the inventory on hand can be determined from inventory records although an actual physical count must still be made at least once a year Copyright2015 Pearson Canada Inc
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