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Chapter 6 - Accounting for Inventory.docx

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University of Toronto Mississauga
Catherine Seguin

Chapter 6 : Inventory and Cost of Goods Sold Review Short term Investments: intend to sell within 12 months, each reporting date adjust to fair market value Accounts receivable • • Percentage of sales (income statement approach) • Aging or percentage of accounts receivable Writing off and recovery of accounts receivable Direct write off method A/R Beg balance Collections Credit sales Write off Recovery Recovery Ending Balance Allow for DA Beg balance Write off Bad debt exp Recovery Ending Balance Ratios: current, acid test, and days’sales in a/r Question 1 – review of a/r 1. Accounts receivable has a debit balance of 2300, and the allowance for uncollectible accounts has a credit balance of $200. An $80 account receivable is written off. What is the amount of net receivables after the write off? a. 2,100 b. 2,220 c. 2,020 d. 2,180 Solution: Net recievables: a/r – allowance for doubtful accounts Before: a/r : 2300, less: allowance for doubtful accounts : 200, net a/r : 2100 After: a/r: 2220. Less: allowance for doubtful accounts: 120, net a/r 2100 DR allowance for Bad debts 80 CRA/r 80 (5,000x13) + (4,000 x 12) = 113,000 Chapter 6 : Inventory and Cost of Goods Sold Question # 4 ABC ltd had a 24,000 beginning inventory and a 26,000 ending inventory. Net sales were 160,000; purchases, $86,000; purchase returns and allowances, 5000 and freight in , $6000. Cost of goods sold for the period is a) 69,000 b) 49,000 c) 81,000 d) 85,000 Solution: BI = 24000 + Purchases: 86000 – R andA: 5000 + Freight in: 6000 - Ending Inventory 26000 = 85000 Answer is C Chapter 6 : Inventory and Cost of Goods Sold Inventory, Cost of Goods Sold and Gross Margin Inventory: the goods or products the company sells. It is a current asset on the balance sheet Cost of Goods Sold: inventory sold, it is an expense on the income statement Gross Profit (also called gross margin): excess of sales revenue over cost of goods sold Hotdog Revenue : $5.00 COGS: 0.25 ___________________________________________________ Gross Profit = 4.75 Computing Cost of Inventory Balance Sheet: cost of inventory on hand = # of units on hand x unit cost Income Statement: cost of goods sold = # of units sold x unit cost Learning Objective 1 : Account for inventory InventoryAccounting Systems 2 main types of inventory accounting systems are perpetual inventory system and periodic inventory system • 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 Refer to pg 334 for journal entries and comparison for difference b/w 2 systems Chapter 6 : Inventory and Cost of Goods Sold Reporting in Financial Statements Net Purchases of Inventory = Purchase price of inventory + freight in – purchase returns and allowances – purchases discount Net Sales = sales revenue – sales returns and allowances – sales discounts Learning Objective 2: understanding various inventory methods What goes into inventory cost? The cost of any asset, such as inventory, is the sum of all costs incurred to bring the asset to its intended use Generally accepted inventory costing methods • Specific unit cost • Weighted average cost • First in – first out (FIFO) Specific Unit Cost: also called specific identification method Some business deal in unique inventory items. These businesses cost their inventories at the specific cost of the particular unit. High periced, low volume (marine – selling boats) Illustration of WeightedAverage and FIFO Costing The big accounting questions are : 1. What is the cost of goods sold for the income statement? 2. What is the cost of ending inventory for the balance sheet WeightedAverage *refer to illustrative data* Goods available for sale (numerator) = beginning inventory + Purchases 40 units = 10 units + 30 units Ending inventory = goods available for sale – sales (units) 25 units = 40 units – 15 units Goods sold = Goods available for sale – Ending Inventory 15 units = 40 units – 25 units Weighted avg : unit cost = cost of goods available for sale / units available for sale
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