Plain Background Power Point Slides Chapter 6 Merchandise Inventory and Cost of Goods Sold3996

8/9/2019 Plain Background Power Point Slides Chapter 6 Merchandise Inventory and Cost of Goods Sold3996

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2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren 1

Merchandise Inventory,Cost of Goods Sold, andGross Profit

Chapter 6


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Income Statements

Service revenue $XXXExpenses

Salary expense XDepreciation expense XIncome tax expense X

Net income $ X

Service CompanyCentury 21 Real Estate

Income StatementYear Ended December 31, 20xx

Sales revenue $185Cost of goods sold 146Gross profit 39Operating expenses:

Salary expense XDepreciation expense XIncome tax expense $ X

Net income $ 4

Merchandising CompanyGeneral Motors Corporation

Income StatementYear Ended December 31, 20xx

2006 Prentice Hall Business Publishing Financial Accounting, 6/e Harrison/Horngren


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Balance Sheets

Current assets:Cash $XShort-term investments XAccounts receivable, net XPrepaid expenses X

Service CompanyCentury 21 Real Estate

Balance SheetYear Ended December 31, 20xx

Current assets:CashShort-term investmentsAccounts receivable, net XInventory

Prepaid expenses

Merchandising CompanyGeneral Motors Corporation

Balance SheetYear Ended December 31, 20xx



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Gross Profit (Gross Margin)

Sales Revenue

- Cost of Goods Sold

= Gross ProfitGross Profit

- Operating Expenses

= Net Income


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Learning Objective 1

Account for inventorytransactions.


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Periodicsystems do not keep acontinuous record of inventory

on hand.Perpetualsystems maintain a

running record to show theinventory on hand at all times.

Inventory Accounting Systems


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Recording Transactions

in the Perpetual SystemPurchase price of the inventory $600,000+ Freight-in 4,000

Purchase returns 25,000 Purchase allowances 5,000 Purchase discounts 14,000

= Net purchases of inventory $560,000


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Ge e a Journa

a e ccountsand Ex anations e it Cr edit


and the T-Accounts

Accounts Payable

560,000Beg. 100,000560,000

Inventory

Inventory 560,000

Accounts Payable 560,000Purchased inventory on account



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and the T-AccountsSale on account $900,000 (cost

$540,000):

General Journal

Date Accounts and Explanations PR Debit Credit

Accounts Receivable 900,000

Sales Revenue 900,000

Cost ofGoods Sold 540,000Inventory 540,000



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and the T-Accounts

Cost of Goods Sold

540,000

Inventory

Beg. 100,000560,000

120,000

540,000


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Reporting in the

Financial StatementsIncome Statement (partial)Sales revenue $Cost of goods sold 54Gross profit

Ending Balance Sheet (partial)Current assets:

Cash

Short-term investments XAccounts receivable, net XXXInventoryPrepaid expenses


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Net salesSales revenue Sales returns & allowances Sales discounts

Reporting in the

Financial StatementsNet purchasesPurchases+ Freight-in Purchase returns & allowances Purchases discount


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What Goes Into Inventory Cost?

Sum of all costs incurred tobring asset to its intended use

Inventory costing methods:Specific unit cost

Weighted-average cost

First-in, first-out (FIFO)

Last-in, first-out (LIFO)


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Beginning inventory (10 units @ $10) $ 100No. 1 (25 units @ $14 per unit) $350No. 2 (25 units @ $18 per unit) 450

Total purchases 800Cost of goods available for sale $ 900

Ending inventory: 20 units

Cost of goods sold: 40 units

Illustrative Data


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Cost of Goods Sold

$ 50350180

$580

Specific Unit Cost

$900 $580 = $320

25 Units @ $14

10 Units @ $18

5 Units @ $10


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Weighted-Average

$900 total cost 60 units = $15/unit

Cost of goods sold = 40 $15 = $600

Ending inventory = 20 $15 = $300


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60 unitsLess units sold 40Ending inventory 20 units

First-In, First-Out

Ending Inventory Cost:

20 units $18 per unit = $360


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60 unitsLess units sold 40Ending inventory 20 units

Last-In, First-Out

Ending Inventory Cost:

10 units 10 =$10010 units 14 = 140Total $240


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Cost of Goods Sold$450

210

$660

Last-In, First-Out

25 Units @ $18

15 Units @ $14


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Income Effects of

Inventory Methods

Specific unit cost $1,000 580 = $420Weighted-average $1,000 600 = $400FIFO $1,000 540 = $460

LIFO $1,000 660 = $340

AssumedSales

Revenue

Cost ofGoodsSold

GrossProfit



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Identify the income and the taxeffects of the inventory

methods.


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The Tax Advantage of LIFO

Gross profit $460 $340

Operating expenses 260 260Income before taxes $200 $ 80Income tax expense (40%) $ 80 $ 32

FIFO LIFO

The most attractive feature of LIFO is lowincome tax payments when prices are

increasing.


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Use of the Various

Inventory Methods

Ot r

%

r

%

FO

31% F FO46%


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Comparison of Inventory

MethodsFIFO produces inventory profits

during periods of inflation

LIFO allows managers tomanipulate net income

LIFO liquidation


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Consistency Principle

Use the same accountingmethods and procedures from

one period to the nextMay change inventory methods,

but must disclose the effects ofthe change on net income


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Disclosure Principle

Financial statements shouldreport enough information to

enable an outsider to makeknowledgeable decisions aboutthe company.


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Conservatism

The least favorable figures arepresented in the financial

statements.


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Lower-of-Cost-or-Market Rule

Report inventory at the lower ofits historical cost or market

(replacement) valueIf the replacement cost falls

below its historical cost, writedown the value of the inventory


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Use the gross profit percentageand inventory turnover to

evaluate business.


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Inventory turnover

= Cost of goods sold Average inventory

Gross profit percentage

= Gross profit Net sales revenue

Using the Financial Statements

for Decision Making


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Estimate inventory by the grossprofit method.


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Objective 6

Show how inventory errors affectcost of goods sold and income.


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Effects of Inventory Errors

An error in the ending inventorycreates errors for cost of goods

sold and gross profit.The current years ending

inventory is next yearsbeginning inventory.


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End of Chapter 6

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Plain Background Power Point Slides Chapter 6 Merchandise Inventory and Cost of Goods Sold3996