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Lecture 9

BU127 Lecture 9: Lecture 9 chapter 8

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Wilfrid Laurier University
Chialin Chen

Chapter 8 – reporting and interpreting cost of sales and inventory  Inventory—tangible property held for sale in the normal course of business or used in producing goods or services for sale o Merchandise (goods held for resale) o Raw materials (processing into finished goods) o Work in progress (in progress of manufacturing) o Finished goods (available for sale)  Cost principle – requires that inventory be recorded at price paid, includes all costs incurred to bring the asset to useable/saleable condition o Invoice price o Freight\inspection costs o Preparation costs Direct labour: earnings of employees who work directly on the products being manufactured factory overhead: manufacturing costs that are not raw material or direct labour costs COS = beginning inventory + purchases – ending inventory Internal control of inventory Perpetual (continuous) system  Provides up-to-date inventory records and cost of sales records  Maintained by transaction-by-transaction basis  Purchase transactions are recorded directly into an inventory account  When each sale is recorded, cost of sale entry is made  DECREASING inventory o In periodic system, ending inventory and cost of sales are determined at end of accounting period based on physical count. COS calculated using COS equation  Beginning inventory + purchases = cost of goods available for sale – COS = ending inventory Merchandise purchase from supplier on account: DR inventory CR T/P Merchandise returned to supplier: DR T/P CR inventory Merchandise sold to customer on account: DR T/R CR sales revenue DR cost of sales CR inventory Merchandise returned by customer: DR sales returns & allowances CR T/R DR in
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