mcgraw-hill/irwin © the mcgraw-hill companies, inc., chapter four accounting for merchandising...
TRANSCRIPT
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
Chapter Four
Accounting for Merchandising
Businesses
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
5- 2
Inventory
Inventory is tangible property that is held for resale or will be used in producing goods or services.
Inventory is reported on the balance sheet as an asset.
Types of inventory: Merchandise inventory Raw materials inventory Work in process inventory Finished goods inventory
manufacturer
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Inventory Cost
The cost principle requires that inventory be recorded for the price paid or the consideration given up.
What type of transaction is the purchase of inventory?
Asset Exchange if cash paid.
Asset Source if “on account”.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Inventory Cost The amount recorded for inventory
should include: Invoice price (minus purchase
discounts), transportation-in costs (also called “freight-in”), inspection costs, and preparation costs.
The company should accumulate costs of purchases until raw materials are ready for use or until merchandise is ready for shipment to customers.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Income Statement Change
Net Sales 7,500Less: Cost of goods sold -
3,000Gross Profit Margin 4,500
Because of Cost of Goods Sold, the format for the Income Statement is modified:
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Product Costs Versus Selling and Administrative Costs
Product Costs
Costs that are included in inventory.
Selling & Admin. Costs
Costs that are not included in inventory. They are sometimes called period
costs.
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Cost of Goods Sold
Cost of goods sold is calculated as the number of units sold during the period multiplied by their unit costs.
Cost of goods sold is a major expense item for most non-service businesses.
The measurement of cost of goods sold is an excellent example of the application of the matching principle Why?
The Cost of Goods Sold EXPENSE is recorded in the period the units are SOLD (REVENUE is recognized), regardless of when the units are paid for. So, the EXPENSE is MATCHED against the related REVENUE.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Cost of Goods Sold
Beginning inventory
Add: Purchases (net)
Cost of Goods Available for Sale
Deduct: Ending inventory
Cost of goods sold
Cost of Goods Available for Sale expresses the total cost of what has been available for sale throughout a given time period.
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Allocation of Inventory Cost Between Asset and Expense
Accounts
Beginning Inventory Balance
+
Inventory Purchased During the
Period
=
Cost of Goods
Available for Sale
Cost of Goods Available for
Sale
Merchandise Inventory
(Balance Sheet)
Cost of Goods Sold
(Income Statement)
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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Purchase $4,000 of Office Supplies Date Account Title Debit Credit
Jan. 6 Supplies 4,000
Cash 4,000
Post from General Journal to the General Ledger
4,000 4,000
Supplies Cash
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$1,000 of Supplies left over at the end of the month Date Account Title Debit Credit
Jan. 30 Supplies Expense 3,000
Supplies 3,000
Record use of $3,000 of Supplies Post from General Journal to the General Ledger
3,000 3,000
Supplies Expense Supplies
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Purchase 1,000 units of Inventory for $4,000 Date Account Title Debit Credit
Jan. 6 Inventory 4,000
Cash 4,000
Purchase 1,000 units @ $4.00 each Post from General Journal to the General Ledger
4,000 4,000
Inventory Cash
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$1,000 of Inventory left over at the end of the month Date Account Title Debit Credit
Jan. 30 Cost of Goods Sold 3,000
Inventory 3,000
Record sale of 750 units of Inventory Post from General Journal to the General Ledger
3,000 3,000
Cost of Goods Sold Inventory
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$3,000 of Inventory was sold for $7,500 Cash Date Account Title Debit Credit
Jan. 30 Cash 7,500
Revenue 7,500
Record sale of Inventory @ $10 each Post from General Journal to the General Ledger
7,500 7,500
Cash Sales Revenue
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A deduction from the invoice price granted to induce early payment
of the amount due.
A deduction from the invoice price granted to induce early payment
of the amount due.
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or Sale
Cash Discounts
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Terms of Sales & PurchasesDiscount Terms: 2/10, n/30 (for example)
2% discount if balance paid in ten days,remainder to be paid within 30 days of sale
tells when and how much must be paid There is a high interest cost of not taking
purchase discounts when offered.
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2/10, n/30Percentage of Discount
# of Days Discount Is Available
Otherwise, the Full
Amount Is Due
# of Days when Full Amount Is
Due
Cash Discounts
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Terms of Sales & PurchasesF. O. B. (Free On Board) shipping
point or F.O.B. destination tells who pays for the shipping and
when ownership “title” passes from the seller to the buyer.
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FOB Shipping and FOB Destination
FOB Shipping Point: Buyer pays the shipping costs because ownership “title” transfers to buyer at the point the shipment starts on its journey.
FOB Destination: Seller pays shipping costs because title does not transfer to the buyer until the goods reach their destination (the buyer’s place of business).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
Who Pays for FOB?
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Business
Supplier
Customer
Shipping Point
Shipping Point
Destination
Destination
Shipping Pt –
Business pays
Shipping Pt –
Customer pays
Destination –
Business pays
Destination –
Supplier pays
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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1. Purchased 1000 units for $4 each on account. (Terms: 2/10, n/30)
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENT
Accts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
1 4,000 = 4,000 =
Asset Source Transaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
5- 22 1. Journalize & Post the purchase.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
1 4,000 = 4,000 =
GENERAL JOURNALDate Account Titles Debit Credit
1 Inventory 4000Accounts Payable 4000
to record 1000 units purchased for $4 ea. on credit
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 bb 4000 1000 bb 6000 bb 2000 bb
4000 (1) Sales Returns Sales Revenue
Inventory Cost of Gds Sold Transportation Out(1) 4000
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2. Paid a trucking company $500to deliver the purchased unitsto our warehouse.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENT
Accts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
2 (500) 500 = = (500) OA
Freight charges paid to get inventory to our place of business (called TRANSPORTATION IN) is part of the cost of the purchase. It is added to the Inventory account, thus increasing the asset value. It is NOT “expensed”.
Asset ExchangeTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
5- 242. Journalize & Post the transportation cost
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
2 (500) 500 = = (500) OA
GENERAL JOURNALDate Account Titles Debit Credit
2 Inventory 500Cash 500
to record $500 Transportation In cost
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 1000 bb 6000 bb 2000 bb
4000 (1) Sales Returns Sales Revenue
Inventory Cost of Gds Sold Transportation Out(1) 4000(2) 500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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3. Sold 620 units on account for $6 each. (Terms 1/10, n/30)
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENT
Accts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3a 3,720 = 3,720 3,720 = 3,720
$6 sales price x 620 units = $3720
3a. Record the Sales Revenue and related Receivable.
Asset SourceTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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3a. Journalize and Post the sale. BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3a 3,720 = 3,720 3,720 = 3,720
GENERAL JOURNALDate Account Titles Debit Credit
3a Accounts Receivable 3720Sales Revenue 3720
to record 620 units sold @ $6 ea.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 1000 bb 6000 bb 2000 bb
(3a)3720 4000 (1) Sales Returns Sales Revenue3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000(2) 500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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620 units sold x $4.50 cost each = $2790
3b. Record the Cost of the Goods Sold and their removal from inventory.
What is the cost of each item in inventory?$4.00 invoice price + $0.50 transportation
= $4.50 per unit$500 transport / 1000 units
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENT
Accts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3b (2,790) = (2,790) 2,790 = (2,790)
620 units sold x $4.50 cost each = $2790
3b. Record the Cost of the Goods Sold and their removal from inventory.
Cost of goods sold
Asset UseTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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3b. Journalize and Post the cost of the sale. BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3b (2,790) = 2,790 = (2,790) GENERAL JOURNAL
Date Account Titles Debit Credit
3b Cost of Goods Sold 2790Inventory 2790
to record the $4.50 cost of 620 units sold
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 1000 bb 6000 bb 2000 bb
(3a)3720 4000 (1) Sales Returns Sales Revenue3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 (3b) 2790 (3b) 2790(2) 500
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4. The customer in Transaction #3A returned 20 units for credit.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
4a (120) = (120) (120) = (120)
$6 sales price x 20 units = $120
4a. Remove the previously recorded Sales Revenue and related Account Receivable.
A separate “Sales Return” contra-revenue account may be used.
Asset UseTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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4a. Journalize and Post the sales return. BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
4a (120) = (120) = (120)
GENERAL JOURNALDate Account Titles Debit Credit
4a Sales Returns (a contra-revenue) 120Accounts Receivable 120
record 20 units returned by customer @ $6 ea.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) 1000 bb 6000 bb 2000 bb
(3a)3720 4000 (1) Sales Returns Sales Revenue(4a) 120 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790(2) 500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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4b. Put the cost of the 20 returned units back into inventory and out of Cost of Goods Sold. (Recall, the units were “costed out” of inventory and charged to Cost of Goods Sold at $4.50 each in Tr. #3b.)
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
4b 90 = 90 (90) = 90
$4.50 x 20 units = $90Reduction in “Cost of Goods Sold”.
Asset SourceTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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4b. Journalize and Post the return to inventory. BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
4b 90 = 90 (90) = 90
GENERAL JOURNALDate Account Titles Debit Credit
4b Inventory 90Cost of Goods Sold 90
record 20 units returned to inventory @ $4.50 ea.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) 1000 bb 6000 bb 2000 bb
(3a)3720 4000 (1) Sales Returns Sales Revenue(4a) 120 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b)(2) 500(4b) 90
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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5a. The Transaction #3a customer paid within the ten day discount period.Record the Sales Discount. (1/10, n/30)
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3a 3,720 = 3,720 3,720 = 3,720
4a (120) = (120) (120) = (120)
5a (36) = (36) (36) = (36)
Original Account Receivable (Transaction 3a) $3,720Less: Sales Return (Transaction 4a) 120Amount owed by customer before discount 3,600x 1% sales discount 1% Sales Discount $ 36
Asset SourceTransaction
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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5a. Journalize and Post the 1% Sales Discount. ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
5a (36) = (36) (36) = (36)
GENERAL JOURNALDate Account Titles Debit Credit
5a Sales Revenue (or Sales Discount) 36Accounts Receivable 36
to record 1% discount on Trans. #3a credit sale
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) 1000 bb 6000 bb 2000 bb
(3a)3720 36 (5a) 4000 (1) Sales Returns Sales Revenue(4a) 120 (5a) 36 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b)(2) 500(4b) 90
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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5b. The Transaction #3a customer paid within the ten day discount period. Record the cash collection.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENT
Accts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
3a 3,720 = 3,720 3,720 = 3,720
4a (120) = (120) (120) = (120)
5a (36) = (36) (36) = (36)
5b 3,564 (3,564) = = 3,564 OA
Original Account Receivable (Transaction 3a) $3,720Less: Sales Return (Transaction 4a) (120)Less: Sales Discount (Transaction 5a) (36) Cash receipt that will satisfy the account $3,564
Asset ExchangeTransaction
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5b. Journalize and Post the cash collection.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
5b 3,564 (3,564) = = 3,465 OA
GENERAL JOURNALDate Account Titles Debit Credit
5b Cash 3564Accounts Receivable 3564
Collect from Tr. 3 customer (less return and disc.)
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) 1000 bb 6000 bb 2000 bb(5b) 3564 (3a)3720 36 (5a) 4000 (1) Sales Returns Sales Revenue
3564 (5b) (4a) 120 (5a) 36 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b)(2) 500(4b) 90
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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6. Returned 50 units to our supplier who granted us credit for the cost of the items but not for any transportation costs.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
6 (225) = (200) (25) 25 = (25)
Technically, this LOSS should be reported in the operating expense section of the income statement. However, this loss is usually NOT MATERIAL, so most companies record it as an increase in the COST OF GOODS SOLD expense account.That’s what we’ll do here.
Supplier cost was $4.00 per unit x 50 = $200. Transportation cost recorded when units were purchased was $0.50 per unit x 50 = $25.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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6. Returned 50 units to our supplier who granted us credit for the
cost of the items but not for any transportation costs. BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
6 (225) = (200) (25) 25 = (25)
GENERAL JOURNALDate Account Titles Debit Credit
6 Accounts Payable 200Cost of Goods Sold (or "Inventory Loss") 25
Inventory 225Adjustment for inventory returned to our supplier.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 (3a)3720 36 (5a) 4000 (1) Sales Returns Sales Revenue
3564 (5b) (4a) 120 (5a) 36 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b)(2) 500 225 (6) (6) 25(4b) 90
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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7. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
7 (45) = (45) 45 = (45)
Units in Beginning Inventory 0+ Units Purchased this period (1000- 50 purchase returns) 950= Units Available for Sale 950- Units Sold (620 – 20 sales returns) (600)= Units that should be in ending inventory
350- Actual ending inventory from count (340)= Units missing 10x $4.50 cost per unit $45.00
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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7. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
7 (45) = (45) 45 = (45)
Technically, this LOSS should be reported in the operating expense section of the income statement. However, this loss is usually NOT MATERIAL, so most companies record it as an increase in the COST OF GOODS SOLD expense account.
That’s what we’ll do here.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
5- 427. A physical inventory count shows 340 units on-hand, indicating 10 units have been lost.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
7 (45) = (45) 45 = (45)
GENERAL JOURNALDate Account Titles Debit Credit
7 Cost of Goods Sold (or "Inventory Loss") 45Inventory 45
Adjustment for missing inventory
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 (3a)3720 36 (5a) 4000 (1) Sales Returns Sales Revenue
3564 (5b) (4a) 120 (5a) 36 3720 (3a)
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b)(2) 500 225 (6) (6) 25(4b) 90 45 (7) (7) 45
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
5- 438a. Paid within discount period, so record the 2% discount on the $4000 Tran. #1 purchase
less $200 Tran. #6 return.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
8a (76) = (76) =
Purchase (Transaction #1) $4000
Less Purchase Return (Trans. #6) 200
Amount owed 3800
X discount % 2%
Amount of Purchase Discount $ 76
This reduces the cost of the inventory and the amount we owe the supplier.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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8a. Paid within discount period, so record the discount on the $4000 Tr. #1 purchase less $200 Tr. #6 return.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
8a (76) = (76) =
GENERAL JOURNALDate Account Titles Debit Credit
8a Accounts Payable 76Inventory 76
2% discount taken on $3,800 purchase less return
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 (3a)3720 36 (5a) (8a) 76 4000 (1) Sales Returns Sales Revenue
3564 (5b) (4a) 120 (5a) 36 3720 (3a) Inventory(1) 4000 2790 (3b) Cost of Gds Sold Transportation Out(2) 500 225 (6) (3b)2790 90 (4b)(4b) 90 45 (7) (6) 25
76 (8a) (7) 45
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc.,
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8b. Paid the remaining balance on the Transaction #1 inventory purchase.
$4000 purchase (Trans. #1)- 200 purchase return (Trans. #6)- 76 purchase discount (Trans. #8a)$3724 remainder to pay supplier
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
8b (3,724) = (3,724) = (3,724) OA
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8b. Paid the remaining balance on the Transaction #1 inventory purchase. ($4000-200-76=$3724 to pay)
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
8b (3,724) = (3,724) = (3,724) OA
GENERAL JOURNALDate Account Titles Debit Credit
8b Accounts Payable 3724Cash 3724
Paid balance due to supplier after return and discount.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 3724 (8b) (3a)3720 36 (5a) (8a) 76 4000 (1) Sales Returns Sales Revenue
3564 (5b) (8b) 3724 (4a) 120 (5a) 36 3720 (3a) Inventory(1) 4000 2790 (3b) Cost of Gds Sold Transportation Out(2) 500 225 (6) (3b)2790 90 (4b)(4b) 90 45 (7) (6) 25
76 (8a) (7) 45
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9. The Sale recorded in Transaction #3a was made with terms of F.O.B. destination. Record payment of the $340 shipping cost.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
9 (340) = (340) 340 = (340) (340) OA
Transportation charges on PURCHASES are added to the cost of the asset, INVENTORY. (Transportation IN)
Transportation charges to ship products TO CUSTOMERS are reported as operating expenses on the income statement. The appropriate account title is TRANSPORTATION OUT (or FREIGHT OUT or SHIPPING EXPENSE).
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9. The Sale recorded in Transaction #3a was made with terms of F.O.B. destination. Record payment of the $340 shipping cost.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW ASSETS = LIABILITY + STK. EQUITY STATEMENTAccts. Accounts Com. Retain. Rev./ Exp./ Net OA,IA,FA
Cash + Receiv. + Inventory = Payable + Stk. + Earn. Gain - Loss = Inc. $ amt
9 (340) = (340) 340 = (340) (340) OA
GENERAL JOURNALDate Account Titles Debit Credit
9 Transportation Out (or Shipping Exp.) 340Cash 340
Paid $340 cost to ship to customer.
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 3724 (8b) (3a)3720 36 (5a) (8a) 76 4000 (1) Sales Returns Sales Revenue
340 (9) 3564 (5b) (8b) 3724 (4a) 120 (5a) 36 3720 (3a) Inventory(1) 4000 2790 (3b) Cost of Gds Sold Transportation Out(2) 500 225 (6) (3b)2790 90 (4b) (9) 340(4b) 90 45 (7) (6) 25
76 (8a) (7) 45
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Clock CompanyEnding Balances of LEDGER Accounts
GENERAL LEDGER ("T" - Accounts) Assets = Liabilities + Equity
Cash Accounts Receiv. Accounts Payable Common Stock Retained Earningsbb 5000 500 (2) bb 4000 120 (4a) (6) 200 1000 bb 6000 bb 2000 bb(5b) 3564 3724 (8b) (3a)3720 36 (5a) (8a) 76 4000 (1) Sales Returns Sales Revenue
340 (9) 3564 (5b) (8b) 3724 (4a) 120 (5a) 36 3720 (3a)eb 4000 eb 4000 1000 eb 3684 eb
Inventory Cost of Gds Sold Transportation Out(1) 4000 2790 (3b) (3b)2790 90 (4b) (9) 340(2) 500 225 (6) (6) 25(4b) 90 45 (7) (7) 45
76 (8a) eb 2770eb 1454
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Timing is EVERYTHING...
Recognize revenue when “earned” earned when an exchange (seller to buyer) occurs
Three levels of the matching principle Product costs (e.g., inventory costs): assets until
produce revenuedirect cause & effect relationship between
revenue and expense Period costs: systematic & rational allocation
e.g., depreciation costs Period costs: recognize as expense as incurred
e.g., advertising costs
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Perpetual Inventory Systems The inventory account is continuously updated for the
following events: Purchases Purchase Discounts Taken Purchase Returns & Allowances Sales (remove from inventory the COST of the units sold) Sales Returns (add to inventory the COST of units returned)
The necessary detailed record-keeping required by the perpetual system has become much easier with current computer technology.
A physical count of the inventory is still required at the end of the accounting period to assure accurate inventory records in case of errors or theft.
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Perpetual Inventory Systems
Cost of Goods Sold . . . Contains the cost of units that have
been sold to customers. Is a temporary account.
(It will be closed out at
the end of the period.) Is an expense account.
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When using the Periodic system, inventory transactions are not recorded directly in the INVENTORY account. Instead, separate accounts are used for
PURCHASESPURCHASE RETURNS &
ALLOWANCESPURCHASE DISCOUNTSTRANSPORTATION IN
Periodic Inventory SystemSeparate Accounts Used
Let’s look at another Inventory system.
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Periodic Inventory Systems Because entries are not made to the
inventory account during the accounting period, the amount of inventory is not known until the end of the period when the inventory count is done.
The PERIODIC system is being used less and less due to advancements in technology that make the extra record keeping of the perpetual system easy and inexpensive.
Periodic inventory systems require more closing entries at the end of the period. (Purchases, Purchase Returns and Allowances, Purchase Discounts, and Transportation In are all separate TEMPORARY accounts that must be closed out at the end of the period.)
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Periodic Inventory System Purchases and Purchase Returns and Allowances Purchases is an account that
holds the current period’s inventory purchases (a debit balance) and is used in the calculation of Cost of Goods Sold on the Income Statement.
The Purchase Returns and Allowances account also is used to calculate Cost of Goods Sold on the income statement. It is a deduction from the cost of purchases in a periodic inventory system.
Bar codes/scanners
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When using the Periodic system Purchase Discounts are recorded in a separate account. This helps managers keep track of the company’s performance in taking advantage of discounts.
Periodic Inventory SystemPurchase Discounts
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Periodic Inventory Systems The ending inventory is determined at the
end of the period by taking a physical count of the goods remaining on hand.
Cost of goods sold is calculated at the end of the accounting period by subtracting the ending inventory (determined from the physical count) from the Cost of Goods Available for Sale.
Beginning Inventory $ 400 + Purchases, net 2000= Goods Available for Sale 2400- Ending Inv. (from count) 500= Cost of Goods Sold $1900
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Gross Margin Percentage
Gross MarginNet Sales
This measure indicates how muchof each sales dollar is left after deducting the cost of goods sold to cover expenses
and provide a profit.
Other things being equal, the company with the higher gross margin percentage is pricing its
products higher.
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Ratios: Gross Margin Percentage
Gross margin %:
Gross margin as a percent of sales
Net sales – CGS gross margin
Net sales net sales=
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Ratios: Gross Margin Percentage
Net sales – CGS = $1,000 – 400
Net sales $1,000
= $600___ = 60% or $.60
$1,000
This tells us that each dollar of sales
contributes 60 cents to the
Gross Margin.
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Return on Sales
Net IncomeNet Sales
Net income expressed as a percentage of sales provides insight as to how much of each sales dollar
is left as net income after all expenses are paid.
Other things being equal, the company with the higher return on sales
percentage is doing a better job of controlling costs.
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Ratios: Return on sales
Return on sales =
Net income
Net sales
Revenues - expenses
Net sales
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Ratios: Return on sales
Return on sales =Net income = Net sales
$500___ = 50% or $.50$1,000
Each dollar of sales is generating 50 cents of Net Income
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Income Statement Formats
Single Step -
with details
Single Step -
condensed
Multi-step -
with details
Multi-step -
condensed
Let’s look at examples…..
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Income Statement Formats
Net Sales 100Less: Cost of goods sold 60Gross Profit Margin 40Operating Expenses: Selling:
Sales Salaries 8 Advertising 2
Total Selling 10 Administrative:
Admin. Salaries 3 Building Rent 8
Total Adm. Exp. 11Total Operating Exp. 21Operating Income 19Non-Operating Rev. (Exp.)
Interest Expense (1)Income before tax 18
Income Tax expense 3Net Income 15
Multi-step with details Multi-step: condensed
Net Sales 100Less: Cost of goods Sold 60Gross Profit Margin 40Operating Expenses: Selling Expenses 10 Administrative Exp. 11 Total Operating Exp. 21 Operating Income 19Non-Operating Rev. (Exp.) Interest Expense (1)Income before tax 18 Income Tax expense 3Net Income 15
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Income Statement Formats
Net Sales 100Less: Cost of goods sold 60Gross Profit Margin 40Operating Expenses: Selling:
Sales Salaries 8 Advertising 2
Total Selling 10 Administrative:
Admin. Salaries 3 Building Rent 8
Total Adm. Exp. 11Total Operating Exp. 21Operating Income 19Non-Operating Rev. (Exp.)
Interest Expense (1)Income before tax 18
Income Tax expense 3Net Income 15
Multi-step with details Multi-step: condensed
Net Sales 100Less: Cost of goods Sold 60Gross Profit Margin 40Operating Expenses: Selling Expenses 10 Administrative Exp. 11 Total Operating Exp. 21 Operating Income 19Non-Operating Rev. (Exp.) Interest Expense (1)Income before tax 18 Income Tax expense 3Net Income 15
The multi-step INCOME Statement format classifies interest as a NON-operating item. But, interest is still an OPERATING ACTIVITY
on the CASHFLOW Statement.
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Income Statement Formats
Net Sales 100
Less Expenses: Cost of goods sold 60 Sales Salaries 8 Advertising 2 Admin. Salaries 3 Building Rent 8 Interest Expense 1 Income Tax Expense 3Total Expenses 85Net Income
15
Single-step with details Single-step: condensed
Net Sales 100Less Expenses: Cost of goods sold 60 Selling 10 Administrative 11 Interest Expense 1 Income Tax Expense 3Total Expenses 85Net Income 15
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Income Statement Formats
Net Sales 100
Less Operating Exp. Cost of goods sold 60 Sales Salaries 8 Advertising 2 Admin. Salaries 3 Building Rent 8 Interest Expense 1Total Oper. Exp. 82Income before taxes 18 Income Tax Expense 3Net Income
15
Single-step with details Single-step: condensed
Net Sales 100Less Expenses: Cost of goods sold 60 Selling 10 Administrative 11Total Oper. Exp. 81Income before taxes 19Income Tax Expense 4Net Income 15
A common modification of the single-step method is to have the income tax expense separated out.
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Common-size Income Statement
Each item on the income statement is expressed as a % of that year’s Net Sales.
Comparisons are made to:
Budget
Previous year(s)
Competitors
%
Net Sales 100.0
- Cost 60.0
=G.P 40.0
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Comparative Common-size Income Statements
2013 2012
Net Sales $3,000 $2,000
Cost of Goods Sold 2,000 1,200
Gross Profit 1,000 800
Operating Expenses:
Selling Expenses 600 400
Administrative Exp. 700 300
Total Oper. Exp. 1,300 700
Net Income ($300) $100
% of N.Sales
100.0
66.7
33.3
20.0
23.3
43.3
(10.0)
% of N.Sales
100.0
60.0
40.0
20.0
15.0
35.0
5.0
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Income Statement Trend Analysis
Trend Analysis shows both Dollar and % changes from one year to the next year for each item on the income statement.
Example:
From 2012 to 2013 Net Sales increased from $2,000 to $3,000. So……Net Sales increased $1,000 which is a 50% increase over 2012 Net Sales. ($1,000 incr./$2,000 Net Sales of 2012 = 50%)
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Income Statement Trend Analysis
2013 2012
Net Sales $3,000 $2,000
Cost of Goods Sold 2,000 1,200
Gross Profit 1,000 800
Operating Expenses:
Selling Expenses 600 400
Administrative Exp. 700 300
Total Oper. Exp. 1,300 700
Net Income ($300) $100
% inc.(dec)
50.0
66.7
25.0
50.0
133.3
85.7
(400.0)
$ inc.(dec.)
$1,000
800
200
200
400
600
($400)
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How about analyzing the Balance Sheet?
The same techniques are used to analyze the Balance Sheet.
Common-size Analysis: Use the TOTAL ASSETS amount as the 100%
figure. So, …….. Express each Balance Sheet item as a % of Total Assets.
Trend Analysis:Same approach as used on the income statement. 1. Calculate the $ change for each bal. sheet item. 2. Express the $ change as a % of the previous
year’s (or base year’s) amount.
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End of Chapter 4
Remember,
Your objectives are to understand what you are doing and to be able to analyze the financial information.
Memorization without understanding is meaningless!