ACCT 2010 May 15

ACCT 2010 May 15 - CHAPTER V Continued Review Contra Sales...

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5/15/08 CHAPTER V – Continued Review: Contra Sales Accounts: Sales Discounts Sales Returns Sales Allowances + - + - + - Contra Purchase Accounts: Purchase Discounts Purchase Returns Purchase Allowances - + - + - + GROSS PURCHASES – PURCHASE RETURNS – PURCHASE ALLOWANCES = NET PURCHASES Perpetual vs. Periodic Inventory Systems On periodic inventory systems, the company must perform a physical inventory count at their year/period end. Inventory Costing Methods: 1. Weighted average 2. Specific Identification 3. FIFO 4. LIFO Once a company decides which method it will use, it cannot change the method frequently. Weighted Average Cost per unit = COGA4S # of units A4S Weighted Average Cost x # of units sold = . ...... COGS Weighted Average Cost x # of units in EI = . ...... EI Exercise 5-11 Exercise 5-12 1. The most realistic method: Specific Identification 2. COGS: Current product costs. LIFO “Current” is the keyword. Last-in First-out. 3. FIFO: Net income is the highest during the period of inflation. 4. FIFO: Ending Inventory is the highest during the period of inflation. 5. “Smooth”s – Weighted Average. 1
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5/15/08 6. Not practical = Specific Identification 7. Greater weight of a larger number of units purchased = Weighted Average 8. Closely follows physical goods = FIFO PROFITIBILITY ANALYSIS 1. GROSS PROFIT RATIO = GROSS PROFIT NET SALES NET SALES - COGS = GROSS PROFIT 2. INVENTORY TURNOVER RATIO = COGS AVERAGE INVENTORY [(BI +EI)/2] 3. DAYS in INVENTORY = # of DAYS IN THE PERIOD INVENTORY TURNOVER RATIO 4. REVENUE – COGS = GROSS PROFIT 2
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5/15/08 Company Activities 1. Service Activities – Primary revenue is services (e.g. American Express) 2. Manufacturing Activities – Primary revenue comes from producing or assembling things for sale (e.g. Boeing) 3. Merchandising Activities – Buying and selling finished merchandise (i.e. Walmart) Contra Sales Accounts: Sales Discounts Sales Returns Sales Allowances + - + - + - Contra Purchase Accounts: Purchase Discounts
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ACCT 2010 May 15 - CHAPTER V Continued Review Contra Sales...

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