slide1
Download
Skip this Video
Download Presentation
Merchandise Inventory, Cost of Goods Sold, and Gross Profit

Loading in 2 Seconds...

play fullscreen
1 / 55

Merchandise Inventory, Cost of Goods Sold, and Gross Profit - PowerPoint PPT Presentation


  • 82 Views
  • Uploaded on

Merchandise Inventory, Cost of Goods Sold, and Gross Profit. Chapter 6. Service Company Century 21 Real Estate Income Statement Year Ended December 31, 20xx. Merchandising Company General Motors Corporation Income Statement Year Ended December 31, 20xx. Service revenue $XXX

loader
I am the owner, or an agent authorized to act on behalf of the owner, of the copyrighted work described.
capcha
Download Presentation

PowerPoint Slideshow about 'Merchandise Inventory, Cost of Goods Sold, and Gross Profit' - etana


An Image/Link below is provided (as is) to download presentation

Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author.While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server.


- - - - - - - - - - - - - - - - - - - - - - - - - - E N D - - - - - - - - - - - - - - - - - - - - - - - - - -
Presentation Transcript
slide1
Merchandise Inventory,

Cost of Goods Sold, and

Gross Profit

Chapter 6

income statements
Service Company

Century 21 Real Estate

Income Statement

Year Ended December 31, 20xx

Merchandising Company

General Motors Corporation

Income Statement

Year Ended December 31, 20xx

Service revenue $XXX

Expenses

Salary expense X

Depreciation expense X

Income tax expense X

Net income $ X

Sales revenue $185

Cost of goods sold 146

Gross profit 39

Operating expenses:

Salary expense X

Depreciation expense X

Income tax expense $ X

Net income $ 4

Income Statements
balance sheets
Service Company

Century 21 Real Estate

Balance Sheet

Year Ended December 31, 20xx

Merchandising Company

General Motors Corporation

Balance Sheet

Year Ended December 31, 20xx

Current assets:

Cash $X

Short-term investments X

Accounts receivable, net X

Prepaid expenses X

Current assets:

Cash $ X

Short-term investments X

Accounts receivable, net X

Inventory 11

Prepaid expenses X

Balance Sheets
accounting for inventory
General Motors Corporation

Balance Sheet (partial)

General Motors Corporation

Income Statement (partial)

Current assets:

Cash $ XXX

Short-term

investments XXX

Accounts receivable XXX

Inventory (1 truck

@$15,000) $15,000

Prepaid expenses XXX

Sales revenue

(2 trucks @ $20,000) $40,000

Cost of goods sold

(2 trucks @ $15,000) 30,000

Gross profit $10,000

Accounting for Inventory
gross profit gross margin
Gross Profit (Gross Margin)

Sales revenues – Cost of goods sold

= Gross profit (before operating expenses)

Gross profit – Operating expenses

= Net income

computing cost
Balance Sheet

Cost of inventory on hand

= Number of units on hand × unit cost

Income Statement

Cost of goods sold

= Number of units sold × unit cost

Computing Cost
learning objective 1
Learning Objective 1

Use the cost-of-goods-

sold model.

cost of goods sold model
Ending

inventory

$30

Cost of goods

available

for sale

$120

Cost of

goods sold

$90

Cost of Goods Sold Model

Beginning

inventory

$20

Purchases

$100

how much inventory should be purchased
How Much InventoryShould Be Purchased?

Budgeted cost of goods sold $6,000

+ Budgeted ending inventory 1,500

= Budgeted cost of goods

available for sale $7,500

– Actual beginning inventory 1,200

= Budgeted purchases $6,300

learning objective 2
Learning Objective 2

Account for inventory

transactions.

inventory accounting systems
Inventory Accounting Systems

Periodic systems do not keep a

continuous record of inventory on hand.

Perpetual systems maintain a running record

to show the inventory on hand at all times.

recording transactions in the perpetual system
Recording Transactionsin the Perpetual System

Debit Inventory

Credit Cash or Accounts Payable

Debit Cash or Accounts Receivable

Credit Sales Revenue

Debit Cost of Goods Sold

Credit Inventory

recording transactions in the perpetual system13
Recording Transactionsin the Perpetual System

Purchase 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

recording transactions and the t accounts
Inventory

Accounts Payable

Beg. 100,000

560,000

560,000

Recording Transactionsand the T-Accounts

Inventory 560,000

Accounts Payable 560,000

Purchased inventory on account

recording transactions and the t accounts15
Recording Transactionsand the T-Accounts

Sale on account $900,000 (cost $540,000):

Accounts Receivable 900,000

Sales Revenue 900,000

Cost of Goods Sold 540,000

Inventory 540,000

recording transactions and the t accounts16
Cost of Goods Sold

540,000

Recording Transactionsand the T-Accounts

Inventory

Beg. 100,000

560,000

120,000

540,000

reporting in the financial statements
Reporting in theFinancial Statements

Income Statement (partial)

Sales revenue $900,000

Cost of goodssold 540,000

Gross profit $360,000

Ending Balance Sheet (partial)

Current assets:

Cash $ XXX

Short-term investments XXX

Accounts receivable, net XXX

Inventory 120,000

Prepaid expenses XXX

reporting in the financial statements18
Reporting in theFinancial Statements

Net purchases = Purchases

+ Freight-in

– Purchase returns & allowances

– Purchases discount

Net sales = Sales revenue

– Sales returns & allowances

– Sales discounts

learning objective 3
Learning Objective 3

Analyze the various

inventory methods.

what goes into inventory cost
Specific unit cost

Weighted-average cost

First-in, first-out (FIFO)

Last-in, first-out (LIFO)

What Goes Into Inventory Cost?

The cost of any asset, such as inventory,

is the sum of all the costs incurred to

bring the asset to its intended use.

Generally accepted inventory costing methods:

illustrative data
Illustrative Data

Beginning inventory (10 units @ $10) $100

No. 1 (25 units @ $14 per unit) $350

No. 2 (25 units @ $18 per unit 450

Total purchases 800

Cost of goods available for sale $900

Ending inventory: 20 units

Cost of goods sold: 40 units

specific unit cost
Specific Unit Cost

5 Units @ $10

Cost of Goods Sold

$ 50

350

180

$580

25 Units @ $14

10 Units @ $18

$900 – $580 = $320

weighted average
Weighted-Average

$900 total cost ÷ 60 units = $15/unit

Ending inventory = 20 × $15 = $300

Cost of goods sold = 40 × $15 = $600

first in first out
First-In, First-Out

Ending inventory cost

60 units

Less units sold 40

Ending inventory 20 units

20 units × $18 per unit = $360

first in first out25
First-In, First-Out

10 Units @ $10

Cost of Goods Sold

$100

350

90

$540

25 Units @ $14

5 Units @ $18

last in first out
Last-In, First-Out

Ending inventory cost

60 units

Less units sold 40

Ending inventory 20 units

10 units × 10 = $100

10 units × 14 = 140

Total $240

last in first out27
Last-In, First-Out

Cost of Goods Sold

$450

210

$660

25 Units @ $18

15 Units @ $14

income effects of inventory methods
Income Effects ofInventory Methods

EndingInventory

Specific unit cost $320.00

Weighted-average $300.00

FIFO $360.00

LIFO $240.00

income effects of inventory methods29
Income Effects ofInventory Methods

Cost of Goods Sold

Specific unit cost $580.00

Weighted-average $600.00

FIFO $540.00

LIFO $660.00

income effects of inventory methods30
Income Effects ofInventory Methods

Assumed

Sales

Revenue

Cost of

Goods

Sold

Gross

Profit

Specific unit cost $1,000 – 580 = $420

Weighted-average $1,000 – 600 = $400

FIFO $1,000 – 540 = $460

LIFO $1,000 – 660 = $340

income effects inventory costs are increasing
Income Effects – InventoryCosts Are Increasing

Ending inventory, gross profit, and net income

FIFO

Weighted-

average

LIFO

income effects inventory costs are decreasing
Income Effects – InventoryCosts Are Decreasing

Ending inventory, gross profit, and net income

LIFO

Weighted-

average

FIFO

learning objective 4
Learning Objective 4

Identify the income and

the tax effects of the

inventory methods.

the tax advantage of lifo
FIFO LIFO

Gross profit $460 $340

Operating expenses 260 260

Income before taxes $200 $ 80

Income tax expense (40%) $ 80 $ 32

The Tax Advantage of LIFO

The most attractive feature of LIFO

is low income tax payments.

comparison of inventory methods
Comparison of Inventory Methods

FIFO produces inventory profits

during periods of inflation.

LIFO allows managers to

manipulate net income.

LIFO liquidation occurs when inventory

quantities fall below the level of the

previous period resulting in higher

net income and increased taxes.

international perspective
International Perspective

LIFO is not allowed in some countries,

e.g., Australia and the U. K.

Companies that use LIFO must use

another accounting method for their

inventories in these foreign countries.

accounting principles and inventories
Accounting Principlesand Inventories

Consistency Principle

Businesses should use the same

accounting methods and procedures

from one period to the next.

A company may change inventory

methods, but it must disclose the

effects of the change on net income.

accounting principles and inventories39
Accounting Principlesand Inventories

Disclosure Principle

The financial statements should

report enough information to

enable an outsider to make

knowledgeable decisions

about the company.

accounting principles and inventories40
Accounting Principlesand Inventories

Materiality Concept

An item is material if it has the potential

to alter a statement user’s decision.

Materiality is specific to

the entity being evaluated.

accounting principles and inventories41
Accounting Principlesand Inventories

Conservatism

Err on the side

of caution when

reporting any item in

the financial statements.

lower of cost or market rule
Lower-of-Cost-or-Market Rule

Inventory is reported at the

lower of its historical cost

or market (replacement) value.

If the replacement cost falls below its

historical cost, the business must write

down the value of its inventory.

objective 5
Show how inventory errors

affect cost of goods sold

and income.

Objective 5
effects of inventory errors
Effects of Inventory Errors

An error in the ending inventory

creates errors for cost of goods

sold and gross profit.

The current year’s ending inventory

is next year’s beginning inventory.

effects of inventory errors45
Effects of Inventory Errors

Period 1

Ending

Inventory

Overstated

by $5,000

Period 1

Beginning

Inventory

Overstated

by $5,000

Period 1

Correct

Sales revenue

Cost of goods sold:

Beg. inventory

Purchases

Cost of goods

available for sale

Ending inventory

Cost of goods sold

Gross profit

$100,000

$10,000

50,000

$60,000

(15,000)

45,000

$ 55,000

$100,000

$15,000

50,000

$65,000

(10,000)

55,000

$ 45,000

$100,000

$10,000

50,000

$60,000

(10,000)

50,000

$ 50,000

ethical considerations
Ethical Considerations

Managers of companies whose profits

do not meet stockholder expectations

are sometimes tempted to “cook the

books” to increase reported income.

What are some possibilities?

1. Overstating ending inventory

2. Creating fictitious sales revenue

learning objective 6
Learning Objective 6

Use the gross profit

percentage and inventory

turnover to evaluate

business.

using the financial statements for decision making
Using the Financial Statementsfor Decision Making

Gross profit percentage

= Gross profit

÷ Net sales revenue

Inventory turnover

= Cost of goods sold

÷ Average inventory

gross profit on 1 of sales for two merchandisers
Gross Profit on $1 of Salesfor Two Merchandisers

$1.00 —

$0.75 —

$0.50 —

$0.25 —

$0.00

Gross

profit $0.21

Gross

profit

$0.61

Cost of

goods sold

$0.79

Cost of

goods sold

$0.39

General

Motors

Pepsi Co.

estimating inventory
Beginning inventory

+ Purchases

= Cost of goods available for sale

– Ending inventory

= Cost of goods sold

Estimating Inventory

The gross profitmethod of estimating

ending inventory is based on the

cost-of-goods-sold model.

estimating inventory51
Beginning inventory

+ Purchases

= Cost of goods available for sale

– Cost of goods sold

= Ending inventory

Estimating Inventory

Rearranging ending inventory and

cost of goods sold makes the model

useful for estimating ending inventory.

estimating inventory52
Beginning

inventory

+

Net

purchases

=

Goods

available

for sale

=

Goods

available

for sale

Cost of

goods

sold

Ending

inventory

Step 2

Estimating Inventory

Step 1

estimating inventory53
Estimating Inventory

Beginning inventory $14,000

Purchases 66,000

Cost of goods available for sale 80,000

Cost of goods sold:

Net sales revenue $100,000

Less estimated gross profit of 42% – 42,000

Estimated cost of goods sold 58,000

Estimated cost of ending inventory $22,000

reporting inventory transactions on the statement of cash flows
Reporting Inventory Transactions on the Statement of Cash Flows

Inventory transactions are operatingactivities

because the purchase and sale of merchandise

drives a company’s operations.

The purchase of inventory requires a cash

payment, and the sale a cash receipt.

ad