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Final

# COMMERCE 1AA3 Study Guide - Final Guide: Time Point, Intangible Asset, Effective Interest Rate

by OC444383

School

McMaster UniversityDepartment

CommerceCourse Code

COMMERCE 1AA3Professor

Emad MohammadStudy Guide

FinalThis

**preview**shows pages 1-3. to view the full**26 pages of the document.**Chapter 6: Inventory and Cost of Goods Sold

•When there are errors when counting inventory, there are various overstatements and

understatements:

oWhen ending inventory in period 1 is overstated by

X

, cost of goods sold is

then understated by

X

. This, in turn, makes gross profit overstated by

X

.

This error carries over in period 2, where beginning inventory is now overstated

by

X

. The cost of goods available for sale is then overstated by

X

. This, in

turn, understates gross profit by

X

. Income tax is also understated due to the

understatement in income. The errors in two consecutive periods counteract one

another. Thus, in period three, all errors are corrected due to the

counterbalancing effect.

o

oSimilarly, understating ending balance of inventory by

X

in period one also

overstates costs of goods sold by

X

. This understates gross profit by

X

.

In period 2, the beginning balance of inventory is now understated by

X

. This

makes the cost of goods available for sale also understated by

X

. This, in

turn, overstates gross profit by

X

. Income tax is also overstated due to the

overstatement in income. The errors in two consecutive periods counteract one

another. Thus, in period three, all errors are corrected due to the

counterbalancing effect.

oNote that ending inventory and gross profit have a direct relationship.

oAlso note that beginning inventory and gross profit have an inverse relationship.

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

o

•There are two important methods when inventory costing:

oFirst-in, first-out (FIFO, periodic method)

This method assumes that the beginning balance of inventory and the

initial purchases of inventory are sold before the inventory purchased

later in the period

oWeighted-average cost (Periodic method)

Weighted−averagecost per unit =cost of goodsavailable

number of units available

Note that

cost of goods available=beginning inventory+purchases

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

•Gross profit/margin percentage is a ratio that measures the percent of each dollar that

is considered profit. The remaining percent is the consumption of cost of goods sold.

This percentage is calculated by the equation

o

Gross profit percentage=Gross profit

Net sales revenue

, where

gross profit=COGAS−EBI

oIf, for example, the gross profit percentage is

45

, each dollar of sales

generates 45 cents of profit and cost of goods sold consumes 55 cents.

oWhen estimating ending inventory using this percentage, the following steps are

followed

First, note that

endinginventory =beginning balance+purchases−cost of goodssold

where

beginning balance+purchases=cost of goods available for sale

cost of goods sold

is an estimate that uses previous net sales revenue

and subtracting the gross-profit margin percent of net sales revenue

This process is illustrated in the following example

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