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Unformatted text preview: Accounting for Merchandise Inventory, Cost of Goods Sold, and the Gross Margin 143 Chapter 6—Accounting for Merchandise Inventory, Cost of Goods Sold, and the Gross Margin CHAPTER OVERVIEW In Chapters 4 and 5, you learned more about current assets (cash, short-term investments, receivables, etc.) and procedures to control them. In this chapter you are introduced to merchandising businesses and some topics unique to them. One of the most important is merchandise inventory, including procedures to account for and control this current asset. The learning objectives for this chapter are to 1. Account for inventory by the perpetual and periodic systems. 2. Apply the inventory costing methods: specific unit cost, weighted average cost, FIFO, and LIFO. 3. Identify the income effects and the tax effects of the inventory costing methods. 4. Apply the lower-of-cost-or-market rule to inventory. 5. Compute the effects of inventory errors on cost of goods sold and net income. 6. Estimate inventory by the gross margin method. 7. Use the gross margin percentage and the inventory turnover ratio to evaluate a business. CHAPTER REVIEW Objective 1 - Account for inventory by the perpetual and periodic systems. The perpetual inventory system is used to keep a continuous record of each inventory item. With the perpetual system, the inventory item record shows quantities received, quantities sold, and the balance remaining on hand. With the periodic inventory system , inventory purchases are debited to the Purchases account, the quantity of ending inventory is counted and valued, and the cost of goods sold equation is used on the income statement. Journal entries using the perpetual system differ from the entries made using the periodic system. To record purchases: Perpetual System Periodic System Inventory XX Purchases XX Accounts Payable XX Accounts Payable XX To record sales: Accounts Receivable XX Accounts Receivable XX S a l e s R e v e n u e s X X S a l e s R e v e n u e s X X Cost of Goods Sold XX I n v e n t o r y X X Chapter 6 144 When the perpetual system is used, Cost of Goods Sold is debited directly and Inventory is credited directly to transfer the cost of the unit sold from Inventory into Cost of Goods Sold. As a result, the balance in the Inventory account should approximate the actual goods on hand at any time. With a periodic system, however, the value of goods on hand cannot be determined by examining the ledger because only additions of inventory have been recorded in the Purchases account. Therefore, actual goods on hand can be determined only by a physical count or by estimating. (Helpful hint: Review exhibit 6-2 in your text.) Whereas cost of goods sold is an account in the perpetual system, cost of goods sold is a calculation in a periodic system. The formula is: Beginning inventory + Net purchases - Ending inventory = Cost of goods sold. Net purchases is Purchases + Transportation charges - Discounts - Returns/allowances....
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