3achapter5

# 3achapter5 - Tools for Business Decision Making 4th Ed...

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1 5-1 Financial Accounting: Tools for Business Decision Making, 4th Ed. Kimmel, Weygandt, Kieso CHAPTER 5 5-2 1. Identify the difference between a service enterprise and a merchandising company. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Distinguish between a single-step and a multiple-step income statement. Study Objectives 5-3 5. Determine cost of goods sold under a periodic system. 6. Explain the factors affecting profitability. 7. Appendix- Explain the recording of purchases and sales of inventory under a periodic inventory system. Study Objectives 5-4 Differences Between a Service Company and a Merchandising Company Primary Source of Revenue ± Service Company- performs services Barber, electrician, plumber, attorney, CPA ± Merchandise Company- sale of merchandise Cars, clothing, food, office supplies 11 1

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2 Income Measurement for Merchandise Companies Total cost of merchandise sold during the period Selling and Administrative Operating Cycles Inventory Systems - Perpetual Computers and electronic scanning equipment make perpetual inventory cost effective! 5-8 PERPETUAL VS. PERIODIC If your business is such that you can track your inventory in detail, then you can use a computer for a “perpetual” count… each time there is a sale, the computer knows. What if your business does not allow for item by item tracking? You need to count what you have from time to time and this is called “Periodic” inventory.
3 5-9 ALGEBRA= PERIODIC INVENTORY Beginning inventory +P u r c h a s e s - Sold (= cogs) =E n d i n g True? B+P-S=E We know what we started with, we know what we bought, and we can go count what we have left…. Can we solve for COGS? B+P-E=COGS!!!! 5-10 Cost of Goods Sold-Periodic Enter beginning inventory Add units or \$ amount of purchases Subtract ending inventory Units bought 1,250 250 Cost of Goods (Units) Available for Sale 1,250 In Units (not \$) 0 Cost of Goods or Number of Units Sold 1,000 11 5 Inventory Systems - Perpetual ± Maintain detailed records of purchases and sales ± Cost of goods sold is determined with each sale Compute and record Cost of goods sold 5-12 PERPETUAL- COUNT? Is there any good reason to count inventory if you are using a perpetual system? YES- Measure shrinkage, verify that system is working etc. We call them “Cycle Counts”

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4 Inventory Systems - Periodic ± No detailed records ± Cost of goods sold determined at end of the period by taking a physical count and pricing it. 5-14 Recording Purchases of Merchandise ² Purchase of merchandise is recorded when goods are received from the seller– AND IS CALLED PURCHASES… UNTIL THE COUNT IS MADE AND THEN MOVED TO INVENTORY ² IF PERPETUAL, IT IS “INVENTORY” WHEN PURCHASED!
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3achapter5 - Tools for Business Decision Making 4th Ed...

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