**TI82** TxtView file generated by CalcText - Kouri_PCHAPx5PNÿcpta chap 5 Sales revenues – Cost of good sold (COGS)= gross profit – Operating expenses = Net income (Loss) ⇨ COGS: the total of cost merchandise sold during the period Operating cycle : the average period of time required for a business to make an initial outlay of cash to produce goods, sell the goods, and receive cash from customers in exchange for the goods. (take more time for a merchandising company than a service company) 1) PERPETUAL SYSTEM 1. Maintain detailed records of the cost of each inventory purchase and sale. 2. Purchases increase Merchandise Inventory. 3. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 4. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 5. Physical count done to verify Merchandise Inventory balance. 6. Provides better control over inventories. 7. Requires additional clerical work and additional cost to maintain inventory records. Ecriture = Purchase Inventory……$XX Acc. Payable or cash …………..$XX Freight-in cost Inventory……$XX Cash……………………………..$XX Freight-out cost Freight-out or delivery expense……$XX cash ……………………………………………..$XX Purchase returns & allowances Account payable……$XX Inventory……………………………..$XX Purchase discount Acc. Payable………..$XX Cash……………………………………$XX Inventory……………………………….$XX Sales Cash or acc. Receivable…..$XX Sales revenues………………………$XX Inventory………………………..$XX Sales returns & allowances Sales returns &allowances… $XX Acc. Receivable…………………….$XX Inventory…………$XX Sales discount Cash………...…..$XX Sales discounts….$XX Acc Receivable………………$XX 2)periodic system 1. Do not keep detailed records of the goods on hand. 2. Purchases of merchandise increase Purchases. 3. Ending Inventory determined by physical count. 4. Cost of goods sold determined by count at the end of the accounting period. 5. Calculation of Cost of Goods Sold: Beginning inventory + purchase = good available for sales – ending inventory = COGS ecriture= Purchase Inventory……$XX Acc. Payable………………..$XX Freight-in cost Freight-in……$XX Cash ……………….………..$XX Freight-out cost Freight-out or delivery expense……$XX cash ……………………………………………..$XX Purchase returns & allowances Account payable……$XX Purchase returns & allowance…………..$XX Purchase discount Acc. Payable………..$XX Cash……………………………………$XX Purchase discount …………………….$XX Sales Cash or acc. Receivable…..$XX Sales revenues………………………$XX Sales returns & allowances Sales returns &allowances… $XX Acc. Receivable…………………….$XX Sales discount Cash………...…..$XX Sales discounts….$XX Acc Receivable………………$XX Periodic inventory system : ⇒ Record revenues when sales are made ⇒ Ending inventory determined by physical count ⇒ Do not record COGS on the date of sale ⇒ Physical inventory count determines : - Cost of merchandise on hand - COGS during the period Beginning Inventory + Inventory Purchases – End Inventory = Cost of Goods Sold Types of inventory Merchandising company : merchandising inventory Manufacturing company: Raw materials, work in process, finished goods Inventory costing Cost flow assumption: FIFO (First-in, First-out); Average cost FIFO - Earliest goods purchased are first to be sold. - Often parallels actual physical flow of merchandise. - Generally good business practice to sell oldest units first. Lower-of-Cost-Or-Net realizable value When the value of the inventory is lower than its cost: -Companies can “write down” the inventory to its net realizable value in the period in which the price decline occurs. -Net realizable value refers to the net amount that a company expects to realize from the sale of inventory Inventory turnover= COGS / Average inventory Days in inventory= Days in year (365)/ Inventory turnover Inventory cost flow method in the perpetual inventory system -FIFO or Average cost Estimating inventory -Gross profit method : estimates the cost of ending inventory by applying a gross profit rate to net sales. ÿ¢