Chapter 5 - Inventory COGS - Dr. Iman Elmarashly.pdf - Financial Accounting MGMT 1007 Lecture notes(5 Chapter 5 Inventory and Cost of Goods Sold Dr Iman

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Financial Accounting MGMT 1007 Lecture notes (5) Chapter 5 Inventory and Cost of Goods Sold Dr. Iman Elmarashly email: [email protected]
Service Company Service revenue \$XXX Expenses Operating and administrative expense X Depreciation expense X Income tax expense X Net income \$ X Merchandising Company (eg GAP) Sales Revenue \$XXX Cost of goods sold XXX Gross profit XXX Operating expenses: X Operating and administrative expense X Depreciation expense X Income tax expense \$ X Net income \$ X Income statement Difference between merchandizing entity and service entity Balance Sheet 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 X Prepaid expenses X Service Company Merchandising Company (eg GAP) 2 Financial Accounting, Pearson Iman Elmarashly
3 Accounting for Inventory Beginning Inventory + additions = Withdrawals + ending inventory Beginning Inventory + purchases = Cost of Goods sold + ending inventory Basic Inventory Equation: COGS = Beginning Inventory + purchases Ending inventory Example: Cosmetics ended May with inventory of \$ 20,000. Elizabeth Baker expects to end June with inventory of \$ 15,000 after selling goods with a cost of \$ 90,000. How much inventory must Elizabeth Baker purchase during June in order to accomplish these results? A. \$ 85,000 B.\$ 95,000 C. \$ 105,000 D. Cannot be determined from the data given. Purchases = COGS - Beginning Inventory + Ending inventory = 90,000 – 20,000 + 15,000 = \$85,000 Iman Elmarashly Financial Accounting, Pearson
Accounting for Inventory Cost of inventory on hand = Inventory on the balance sheet Asset on the balance sheet Cost of inventory that is being sold = Cost of Goods sold Expense on the income statement When Leon bought 3 chairs each for \$300 Current assets: Cash \$ X Short-term investments X Accounts receivable, net X Inventory (300 x 3) 900 Prepaid expenses X When Leon sold 2 chairs each for \$500 Current assets: Cash \$ X Short-term investments X Accounts receivable, net X Inventory (300 x 1) 300 Prepaid expenses X Only one chair is left in the inventory Sales Revenue 2 chairs @ price \$500 each 1000 Cost of goods sold 2 chairs @ cost \$300 each 600 Gross profit 400 Balance sheet Income statement Balance sheet Two chairs are sold Inventory’s cost shifts from asset to expense when the seller delivers the goods to the buyer. Once sold Financial Accounting, Pearson Iman Elmarashly 4
Two main types of inventory accounting systems Perpetual System Periodic System Used for all types of goods. Today, most businesses use it Used for inexpensive goods What goes into cost of inventory? Net purchases of inventory = Purchase price + Freight in Purchase return Purchase allowance Purchase discounts Transportation cost to move the goods from the seller to the buyer Granted by the seller to compensate for a mistake For early payment For unsuitable goods Financial Accounting, Pearson Iman Elmarashly Keeps a running total of all goods bought, sold, and on hand Does NOT keep a running total of all goods bought, sold, and on hand

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