CH7 FINANCIAL

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Department
Accounting & Financial Management
Course
AFM 123
Professor
Peter Blake
Semester
Winter

Description
Chapter 7 Class Notes Inventory • Recorded on the balance sheet in current assets • Placed after Cash and Accounts Receivable • Merchandisers: buy the inventory for resale - they only have one inventory account • Manufacturers: make goods for sale - have three inventory accounts and are going to buy some goods • Raw Materials: whatever they need to make the goods • Work in Process: Build whatever is being built • Finished Goods: Whatever has been made and then eventually sold to the customer • The goods remain in inventory (on the balance sheet) when you sell. • All costs are on balance sheet until sold - do not hit the income statement Income Statement • Gross Profit = Sales - Cost of Goods Sold • Include in inventory all costs incurred to bring goods to a saleable condition (includes freight, storage, sales taxes - basically anything you needed to do to get the goods and sell them to the customer) • Cost of Goods Sold Equation = (starting inventory + purchased inventory) - ending inventory Jan 1st starting inventory with 1 000,000 Purchased 4 000,000 Dec 21 ending inventory with 500,000 Therefore: Cost of goods sold is 4 500 000 BI = Beginning inventory P = purchases EI = ending inventory GAS = Goods available for sale Inventory Costing Methods • Companies have choice 1. Specific Identification - big ticket items (cars, jewellery, watches, etc.) 2. Weighted Average - most manufacturers and merchandisers (if not all) 3. First-in, First Out (FIFO) - whatever is the oldest inventory item, gets sold first - most manufacturers and merchandisers (if not all Example: ABC Corp. inventory transactions for January Jan. 1 Opening balance 400 units @ $12 each --> weighted average Jan. 2 Purchase 300 @ $12.50 Jan. 5 Purchase 250 @12.75 Jan. 6 Sell 300 Jan. 9 Purchase 150 @ $13.00 Jan. 10 Sell 500 Jan. 16 Purchase 100 @ $13.25 Jan. 25 Sell 150 Jan. 29 Sell 150 Fifo Cost Jan. 6 Sale from opening balance CGS = 300 x 12 = $3,600 Jan 10 Sale 100 from opening balance 300 from Jan. 2 100 from Jan. 5 CGS = 100 x 12 + 300 x 12.50 + 100 x 12.75 = 6,225 $6,225 Jan. 25 Sale from Jan. 5 purchase CGS = 150 x 12.75 = 1,912.5 Jan. 29 Sale from Jan. 9 purchase CGS = 150 x 13 = $1,950 Ending Invento
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