Chapter 5 Part 2. Businesses take actual count of inventory at least once per year Actual count of...

Chapter 5 Part 2

Businesses take actual count of inventory at least once per year

Actual count of inventory may differ from amount on the books due to:◦ Theft or Damage – Inventory Shrinkage◦ Errors

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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Cost of goods sold

Inventory

To adjust for shrinkage

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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Cost of Goods Sold 300

Inventory 300

Adjustment for shrinkage

$40,500 (per books) -40,200 (physical count) $300 (shrinkage)

Prepare a merchandiser’s financial statements

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Multi-step Single-step

Lists several important subtotals◦ Gross profit◦ Operating income

More popular

Groups all revenue and all expenses together◦ No subtotals

Works well for service companies

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Step 1 – Net Sales Revenue

Sales Revenue– Sales Discounts– Sales Returns and Allowances Net Sales Revenue

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Step 2: Gross Profit Net sales- Cost of goods sold

Gross profit

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Step 3: Operating Income

Operating Expenses

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Step 3: Operating Income Net sales Cost of goods sold

Gross profit -Operating expenses

Operating income

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Step 4: Net Income (Loss)

+ Other revenues- Other expenses

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Net sales Cost of goods sold

Gross profit-Operating expenses Operating income

Other revenue and expenseNet income (loss)

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Greg’s Groovy TunesIncome Statement

Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900Cost of Goods Sold (90,800) Gross Profit 75,100Operating Expenses: Wages expense $10,200

Rent expense 8,400 Insurance expense 1,000

Depreciation expense 600Supplies expense 500 20,700

Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100

Multi-step Single-step

Lists several important subtotals◦ Gross profit◦ Operating income

More popular

Groups all revenue and all expenses together◦ No subtotals

Works well for service companies

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A single-step income statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income.

Net Income = (Revenues + Gains) – (Expenses + Losses)

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The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).

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Net sales Cost of goods sold Expenses Net income (loss)

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Greg’s Groovy TunesIncome Statement

Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900 Operating Expenses: Cost of goods sold $90,800 Wages expense 10,200

Rent expense 8,400 Interest expense 1,300

Insurance expense 1,000 Depreciation expense 600

Supplies expense 500 Total expense (112,800) Net Income $53,100

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Shows relationship of each item to a base amount on financial statements

Income statement – each item expressed as percentage of net sales

Balance sheet – each item expressed as percentage of total assets

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Percentages based on total revenues:Cost of goods sold: 2010: 90,000/150,000 = 60%

2011: 90,800/165,900 = 54.7%Wages Expenses: 2010: 7,500/150,000 = 5%

2011: 10,200/165,900 = 6.1%

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Percentages based on total revenues:Rent Expense: 2010: 8,400/150,000 = 5.6%

2011: 8,400/165,900 = 5.1%Interest Expense: 2010: 1,500/150,000 = 1%

2011: 1,300/165,900 = .8%

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Percentages based on total revenues:Insurance Expense: 2010: 1,500/150,000 1%

2011: 1,000/165,900 = .6%Depreciation Expense: 2010: 3,000/150,000 = 2%

2011: 1,600/165,900 = .4%

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Percentages based on total revenues:Supplies Expense: 2010: 600/ 150,000 = .4%

2011: 500/165,900 = .3%

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Greg’s Groovy tunes

Comparative Vertical Analysis Income Statement

Years Ended December 31, 2011 and 2010

2011 2010

Net Sales $165,900 100.0% $150,000 100.0%

Cogs 90,800 54.7% 90,000 60% Wages Expense 10,200 6.1 7,500 5

Rent Expense 8,400 5.1 8,400 5.6

Interest Expense 1,300 .8 1,500 1

Insurance Expense 1,000 .6 1,500 1

Depreciation Expense 600 .4 3,000 2 Supplies Expense 500 .3 600 .4 Total Expenses 112,800 68% 112,500 75%Net Income $53,100 32% 37,500 25%

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Greg’s Groovy TunesStatement of Owner’s Equity

Year Ended December 31, 2011Amy Toms, Capital, Dec. 31, 2010

$25,900Net Income

53,100 Subtotal

$88,550Greg Moore, Withdrawals

(54,100)Greg Moore, Capital, Dec. 31, 2011

$24,900

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AssetsCurrent AssetsCash $2,800Accounts Receivable 4,600Inventory 40,200Prepaid Insurance 200Supplies

100 Total Current Assets

$47,900Furniture $33,200Accumulated

depreciation (3,000) 30,200

Total Assets $78.100

LiabilitiesCurrent LiabilitiesAccounts Payable $39,500Unearned Serv. Revenue 700Wages payable 400 Total Current Liabilities

$40,600 Long-term Liabilities: Notes payable

12,600Total Liabilities

53,200Owner’s Equity

Greg Moore, Capital 24,900 Total Liabilities &

Owner’s Equity $78,100

Greg’s Groovy TunesBalance Sheet

December 31, 2011

Use gross profit percentage and inventory turnover to evaluate a business

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Carefully watched measure

Gross Profit Net Sales

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Small increase may indicate rise in

income

Small decrease may indicate

trouble

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Gross Profit Net Sales

What is Gross Profit? It is what you have left from sales after paying for the cost of making those sales, to pay all other expenses. If your costs of inventory starts to rise and you don’t raise your prices to increase net sales, this ration will start to fall this means your overall profits are being squeezed.

Net SalesLess: Cost of Goods Sold--------------------------------Gross Profit

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Carefully watched measure

Gross Profit-$75,100 Net Sales- $165,900

45.3%

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Small increase may indicate rise in

income

Small decrease may indicate

trouble

Cost of goods soldAverage inventory

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Measures how rapidly inventory is sold (To get the amount of cost of goods sold that I did this year, how many times was the amount I kept in inventory replaced?) Because inventory costs money to keep around, the more cost of goods sold I can get from a very small inventory the better.)The higher the turnover, the

more quickly inventory is sold

Cost of goods soldAverage inventory

To get the amount of cost of goods sold that I did this year, how many times was the amount I kept in inventory replaced?) Because inventory costs money to keep around, the more cost of goods sold I can get from a very small inventory the better.

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Compute the Rate of Inventory turnover Compute the Rate of Inventory turnover assuming that Groovy Tunes had a 12/31/10 assuming that Groovy Tunes had a 12/31/10

Inventory of $38,600 and a $40,200 Inventory on Inventory of $38,600 and a $40,200 Inventory on 12/31/1112/31/11

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Inventory Turnover:

= $90,800 $(38,600+40,200)/2

= 2.3 timesCost of goods soldAverage inventory

Adjust and close the accounts of a merchandising business

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Greg’s Groovy TunesIncome Statement

Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900Cost of Goods Sold (90,800) Gross Profit 75,100Operating Expenses: Wages expense $10,200

Rent expense 8,400 Insurance expense 1,000

Depreciation expense 600Supplies expense 500 20,700

Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100

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1. Close all income statement accounts with credit balances to Income Summary

2. Close all income statement accounts with debit balances to Income Summary

3. Close Income Summary to Capital4. Close Withdrawals to Capital

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GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Dec 31 Sales Revenue 169,300

Income Summary 169,300

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1. Close all income statement accounts with credit balances to Income Summary

2. Close all income statement accounts with debit balances to Income Summary

3. Close Income Summary to Capital4. Close Withdrawals to Capital

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GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Dec 31 Income Summary 116,200

Sales Ret. & Allowances 2,000

Sales Discounts 1,400

Cost of goods sold 90,800 Wages Expense 10,200

Rent Expense 8,400Depreciation Expense 600Insurance Expense 1,000

Supplies Expense 500

Interest Expense 1,300

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1. Close all income statement accounts with credit balances to Income Summary

2. Close all income statement accounts with debit balances to Income Summary

3. Close Income Summary to Capital4. Close Withdrawals to Capital

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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Dec 31 Income Summary 53,100

Greg Moore, Capital 53,100

(169,300 – 116,200)

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1. Close all income statement accounts with credit balances to Income Summary

2. Close all income statement accounts with debit balances to Income Summary

3. Close Income Summary to Capital4. Close Withdrawals to Capital

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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Dec 31 Income Summary 53,100

Greg Moore, Capital 53,100

(169,300 – 116,200)

31 Greg Moore Capital 54,100

Greg Moore, Withdrawals 54,100