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Final

COMMERCE 1AA3 Study Guide - Final Guide: Fifo (Computing And Electronics), Cash Cash, Combined Gas And Steam


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
Aadil Merali Juma
Study Guide
Final

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Chapter: Ietor ad COGS
Inventory is an asset held for resale or used to produce services and goods for sale
- Inventory is recorded at cost PLUS all costs to acquire and prepare the inventory for sale
- includes HST, installation, training, inspection, etc.
- The minute the inventory is ready for sale, the costs (ex. insurance) are no longer a part
of the cost rather now an operating cost in the income statement
- Freight IN money paid to bring in the asset (inventory cost)
- Freight OUT money cost to ship a good to the buyer (administrative expense)
Shipping Terms
FOB Shipping Point
FOB Destination
Buyer is responsible for the good at the point
of shipping (buyer owns good in transit)
Seller is responsible for the good until it
reaches the buyer (seller own good in transit)
Iluded i purhaser’s ietor out
Included i seller’s ietor out
Purchaser pays transportation costs
Seller pays transportation costs
Cost of inventory on hand = Inventory Asset on the balance sheet
Cost of inventory sold = Cost of Goods Sold Expense on the income statement
Inventory Systems
Periodic inventory systems do not keep a detailed or continuous record of the inventory on
hand. Instead at the end of the period, the business takes a physical inventory count to
determine cost of goods sold.
- Net Sales (= Sales S Discounts S Returns and Allowances + S Discount Forfeited)
COGS = Gross Profit
- No inventory account exits, use a temporary purchase accounts
- Requires adjusting entries
- PERIODIC DOES NOT UPDATE INVENTORY UNTIL YEAR END (EVEN IF ALL INVENTORY IS
DAMAGED) TRICK QUESTION
Periodic System Adjusting Entries
1. Physical Count of Ending Inventory (EI)
2. Calculate COGP = Gross Purchase P Discounts P Returns and Allowances + Freight In
3. Calculate COGAS = BI + Purchases (COGP)
4. Calculate COGS = BI + Purchases (COGAS) - EI
5. Prepare the following entry:
DR. Cost of goods sold XX
Inventory (EB) XX
Purchase returns and allowances XX
Purchase discounts XX
CR. Inventory (BB) XX
Purchases XX
Freight in XX
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Perpetual inventory system keeps a continuous record of each inventory item. Cost of goods
sold and inventory on hand are updated each time a sale occurs.
Transaction
Perpetual System
Periodic System
Purchase of
Merchandise
Inventory
Cash or A/P
Purchases
Cash or A/P
Return of
damaged goods
Cash or A/P
Inventory
Cash or A/P
Purchases Returns and Allowances
Sale of
Merchandise
Cash or A/R
Sales Revenue
Cost of goods sold
Inventory
Cash or A/R
Sales Revenue
Payment for
freight by seller
Freight out
Cash
Freight out
Cash
Payment for
freight by buyer
Inventory
Cash
Freight in
Cash
Inventory Costing Methods
A company can use any of these methods since they are all permitted under Generally
Accepted Accounting Principles. The methods can have very different effects on reported
profits, income taxes, and cash flow. Therefore, companies select their inventory method with
great care depending on their profit and cash flow objectives.
Using different inventory methods causes no change in the number of units available for sale,
sold, or in ending inventory. Also, COGAS = COGS + Ending Inventory note that EI and COGS
can vary depending on the inventory method used, however will always result in the same
COGAS.
First In, First Out (FIFO)
- COGS assumes oldest items are sold first
- EI consists of the most recent purchases
- Number of units x Cost
Weighted Average Cost
- Average cost per unit = COGAS/Number of units available
- COGS = Number of units sold x Average cost per unit
- EI = Number of units on hand x Average cost per unit
Note: When inventory costs are increasing ... Weighted Average COGS is higher, GP is lower,
and NI is lower. FIFO COGS is lower, GP is higher, and NI is higher.
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Unit Cost
- Specific cost of the particular unit
- Used for unique inventory items, too expensive for similar products or price ranges
Principles Related to Inventory
Comparability investors often compare financial statements from year to the next, therefore a
company must consistently use the same accounting method each year.
Disclosure a company should report relevant and representationally faithful information about
economic affairs for outsiders to make informed decisions about the business.
- Law Suits?
Lower Cost or Net Realizable Value (LCNRV): requires an asset be recorded at lower amount
either historical cost or net realizable value (NRV)
- Based on the premise that inventory can become obsolete or damaged or its selling price
can decline
- NRV = Fair Value Selling Cost
- To write down inventory:
DR. Cost of Goods Sold
CR. Inventory
Gross Profit Percentage = Gross Profit GP = Sales - COGS
Net Sales Revenue
Inventory Turnover = COGS How quickly you sell the inventory
Average Inventory
Inventory Errors are corrected over a two-year period, since ending inventory in one period is
the beginning inventory of the following period, resulting in no net effect.
- Note that EI and COGS work opposite to each other and BI and COGS work together
Period 2
Inventory Error
Cost of Goods
Sold
Gross Profit
and Net Income
Cost of Goods
Sold
Gross Profit
and Net Income
Period 1
Ending inventory
overstated
Understated
Overstated
Overstated
Understated
Period 1
Ending inventory
understated
Overstated
Understated
Understated
Overstated
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