Study Guides (390,000)
CA (150,000)
McMaster (9,000)
COMMERCE (1,000)
A.M (4)
Final

COMMERCE 1AA3 Final: Commerce 1AA3 Final Exam Review


Department
Commerce
Course Code
COMMERCE 1AA3
Professor
A.M
Study Guide
Final

This preview shows pages 1-3. to view the full 23 pages of the document.
Commerce 1AA3 Final Exam Review: Chapters 6, 7, 9 & 10
Chapter 6: Inventory and Cost of Goods Sold
โ€ข Objectives: covers accounting for inventory and cost of goods sold. It also shows you
how to analyze financial statements.
โ€ข Gross Profit (Margin) is the difference between Net Sales and Cost of Goods Sold.
Account for Inventory Using the Perpetual and Periodic Inventory Systems
โ€ข Inventory is an asset held for resale or used to produce services and goods for sale.
โ€ข Merchandising firms only have Merchandise Inventory.
โ€ข Manufacturing firms have three types of inventory:
o Raw Materials
o Work in Process
o Finished Goods
Relationships Between Inventories
โ€ข Ending Raw Materials Inventory = Beginning Raw Material Inventory + Raw
Materials Purchases โ€“ Raw Material Used
โ€ข Ending Work in Process = Beginning Work In Process + (Direct Labour + Raw
Materials Used + Overhead) โ€“ Cost of Goods Manufactured
โ€ข Ending Finished Goods Inventory = Beginning Finished Goods Inventory + Cost of
Goods Manufactured โ€“ Cost of Goods Sold
Costs Included in Inventory Purchases
โ€ข The Cost Principle requires that Inventory be recorded at the price paid plus all
the costs incurred to bring the inventory to saleable conditions.
o Invoice Price
o Freight and Insurance
o Inspection Costs
o Preparation Costs
Inventory Systems
โ€ข Perpetual
o Detailed records of the cost of each inventory purchase and sale are
maintained.
o Cost of goods sold determined and inventory account updated each time a
sale occurs.
o Provides better control over inventory.
โ€ข Periodic
o Detailed records are not kept throughout the period.
o Cost of goods sold determined and inventory account updated only at the end
of the accounting period, when a physical inventory count is taken. An
adjusting entry is required.
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Transaction
Perpetual System
Periodic System
Purchase of Merchandise
Debit: Inventory
Credit: Cash or Accounts
Payable
Debit: Purchases
Credit: Cash or Accounts
Payable
Return of Damaged Goods
Debit: Cash or Accounts
Payable
Credit: Inventory
Debit: Cash or Accounts
Payable
Credit: Purchases, Returns
and Allowances
Sale of Merchandise
Debit: Cash or Accounts
Receivable
Credit: Sales Revenue
OR
Debit: Cost of Goods Sold
Credit: Inventory
Debit: Cash or Accounts
Receivable
Credit: Sales Revenue
Payment for Freight by
Seller
Debit: Freight Out
Credit: Cash
Debit: Freight Out
Credit: Cash
Payment for Freight by
Buyer
Debit: Inventory
Credit: Cash
Debit: Freight In
Credit: Cash
Inventory Quantities
โ€ข Take a physical count, at the end of the accounting period; determine what is
included in inventory.
o Ownership of Goods in Transit
โ–ช FOB Shipping Point: Legal title passes to the purchaser when items
leave the sellers place of business. The purchaser owns the good while
it is in transit. This can be included in the purchaserโ€™s inventory count.
Therefore, the purchaser pays transportation costs.
โ–ช FOB Destination: Legal title passes to purchaser when the item arrives
at their receiving dock. The seller still owns the good while in transit.
Which is why it is included in the sellers inventory count. Therefore,
the seller pays transportation costs.
o Consigned Goods
Periodic System Adjusting Entries
โ€ข 1. Physical count of ending inventory
โ€ข 2. Calculate cost of goods purchased as:
โ€ข ๎กฏ๎กป๎กณ๎กผ ๎ตŒ ๎œฒ๎‘๎Ž๎œฟ๎„๎œฝ๎๎๎ ๎ต† ๎œฒ๎‘๎Ž๎œฟ๎„๎œฝ๎๎๎€ƒ๎œด๎๎๎‘๎Ž๎Š๎๎€ƒ๎†ฌ๎€ƒ๎œฃ๎ˆ๎ˆ๎‹๎“๎œฝ๎Š๎œฟ๎๎ ๎ต† ๎œฒ๎‘๎Ž๎œฟ๎„๎œฝ๎๎๎€ƒ๎œฆ๎…๎œฟ๎‹๎‘๎Š๎๎ ๎ต…
๎œจ๎Ž๎๎…๎ƒ๎„๎๎€ƒ๎œซ๎Š
โ€ข 3. Calculate Cost of Goods Available for Sale as:
โ€ข ๎กฏ๎กป๎กณ๎กญ ๎ตŒ ๎œค๎๎ƒ๎…๎Š๎Š๎…๎Š๎ƒ๎€ƒ๎œซ๎Š๎’๎๎Š๎๎‹๎Ž๎• ๎ต… ๎œฅ๎‹๎๎๎€ƒ๎‹๎‚๎€ƒ๎œฉ๎‹๎‹๎€๎๎€ƒ๎œฒ๎‘๎Ž๎œฟ๎„๎œฝ๎๎๎€
โ€ข 4. Calculate Cost of Goods Sold as:
โ€ข ๎กฏ๎กป๎กณ๎กฟ ๎ตŒ ๎œฅ๎‹๎๎๎€ƒ๎‹๎‚๎€ƒ๎œฉ๎‹๎‹๎€๎๎€ƒ๎œฃ๎’๎œฝ๎…๎ˆ๎œฝ๎œพ๎ˆ๎๎€ƒ๎‚๎‹๎Ž๎€ƒ๎œต๎œฝ๎ˆ๎๎€ƒ๏ˆบ๎œต๎๎๎Œ๎€ƒ๎ต๏ˆป๎ต† ๎€ƒ๎œง๎Š๎€๎…๎Š๎ƒ๎€ƒ๎œซ๎Š๎๎’๎Š๎๎‹๎•๎€ƒ๏ˆบ๎œต๎๎๎Œ๎€ƒ๎ณ๏ˆป
โ€ข 5. Prepare the Journal Entry as follows:
find more resources at oneclass.com
find more resources at oneclass.com

Only pages 1-3 are available for preview. Some parts have been intentionally blurred.

Cost of Goods Sold
XX
Inventory (Ending Balance)
XX
Purchase Returns & Allowances
XX
Purchase Discounts
XX
Inventory (Beginning Balance)
XX
Purchases
XX
Freight In
XX
Inventory Costing Methods
โ€ข All methods have very different effects on reported profits, income taxes, and cash
flow. Depending on their objectives a company may choose the one to best suit their
needs.
โ€ข Specific Identification Cost: Used for businesses with unique inventory items, such
as automobiles, antique furniture, jewels and real estate. Businesses cost their
inventories at the specific cost of the particular unit. This would be too expensive for
inventories with common characteristics.
o Cost Flow Assumption: The cost of goods available for sale is split between
the cost of goods sold and the cost of ending inventory. When possible
specific identification should be applied, otherwise it is assumed to be First-
In, First-Out (FIFO) or Weighted Average Cost (WAC).
o FIFO: The oldest units are sold first. The cost of inventory consists of the
newest units.
o Weighted Average: The cost per unit is the same for all units in inventory
โ€ข Cost Flow Assumptions and Inventory Systems
o Periodic: Assumes all sales are made after all purchases.
โ–ช Average Cost: Cost Per Unit = COGAS/Total Units Available for Sale
o Perpetual: Apply the cost flow assumption after each sale. The weighted
average cost changes after each purchase.
โ€ข Approach
o Always calculate the following regardless of the inventory system.
โ–ช Total Units Available for Sale (Total Units Sold)
โ–ช Cost of Goods Available for Sale (Units in Ending Inventory)
โ€ข Average Cost (Weighted Average Cost Method): is based on the average cost of
inventory during the period.
o ๎œฃ๎’๎๎Ž๎œฝ๎ƒ๎๎€ƒ๎œฅ๎‹๎๎๎€ƒ๎œฒ๎๎Ž๎€ƒ๎œท๎Š๎…๎ ๎ตŒ ๎€ƒ ๎ฎผ๎ฏข๎ฏฆ๎ฏง๎€ƒ๎ฏข๎ฏ™๎€ƒ๎ฏ€๎ฏข๎ฏข๎ฏ—๎ฏฆ๎€ƒ๎ฎบ๎ฏฉ๎ฏ”๎ฏœ๎ฏŸ๎ฏ”๎ฏ•๎ฏŸ๎ฏ˜
๎ฏ‡๎ฏจ๎ฏ ๎ฏ•๎ฏ˜๎ฏฅ๎€ƒ๎ฏข๎ฏ™๎€ƒ๎ฏŽ๎ฏก๎ฏœ๎ฏง๎ฏฆ๎€ƒ๎ฎบ๎ฏฉ๎ฏ”๎ฏœ๎ฏŸ๎ฏ”๎ฏ•๎ฏŸ๎ฏ˜
o ๎œฉ๎‹๎‹๎€๎๎€ƒ๎œฃ๎’๎œฝ๎…๎ˆ๎œฝ๎œพ๎ˆ๎ ๎ตŒ ๎œค๎๎ƒ๎…๎Š๎…๎Š๎Š๎ƒ๎€ƒ๎œซ๎Š๎๎’๎Š๎๎‹๎Ž๎• ๎ต… ๎œฒ๎‘๎Ž๎œฟ๎„๎œฝ๎๎๎
o ๎œฅ๎‹๎๎๎€ƒ๎‹๎‚๎€ƒ๎œฉ๎‹๎‹๎€๎๎€ƒ๎œต๎‹๎ˆ๎€ ๎ตŒ ๎œฐ๎‘๎‰๎œพ๎๎Ž๎€ƒ๎‹๎‚๎€ƒ๎œท๎Š๎…๎๎๎€ƒ๎œต๎‹๎ˆ๎€๎€ƒ๎”๎€ƒ๎œฃ๎’๎๎Ž๎œฝ๎ƒ๎๎€ƒ๎œฅ๎‹๎๎๎€ƒ๎Œ๎๎Ž๎€ƒ๎œท๎Š๎…๎
o ๎œง๎Š๎€๎…๎Š๎ƒ๎€ƒ๎œซ๎Š๎๎’๎Š๎๎‹๎Ž๎• ๎ตŒ ๎œฐ๎‘๎‰๎œพ๎๎Ž๎€ƒ๎‹๎‚๎€ƒ๎œท๎Š๎…๎๎๎€ƒ๎‹๎Š๎€ƒ๎œช๎œฝ๎Š๎€๎€ƒ๎”๎€ƒ๎œฃ๎’๎๎Ž๎œฝ๎ƒ๎๎€ƒ๎œฅ๎‹๎๎๎€ƒ๎Œ๎๎Ž๎€ƒ๎œท๎Š๎…๎
โ€ข First-In, First-Out (FIFO): the first costs into inventory are the first costs assigned
to cost of goods sold. Under FIFO, the cost of ending inventory is always based on
the latest costs incurred.
find more resources at oneclass.com
find more resources at oneclass.com
You're Reading a Preview

Unlock to view full version