Mgmt 200 Fall 2008 Chap 5 Inventories and COGS

Mgmt 200 Fall 2008 Chap 5 Inventories and COGS -...

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Inventories and Cost of Goods Sold Chapter 5
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Income Statement Format ABC Inc Income Statement for 2006 Net Sales $100,000 Cost of goods sold 60,000 Gross margin 40,000 Operating expenses 25,000 Operating income 15,000 Non-operating items 4,000 Income before tax 19,000 Income tax expense 7,600 Net income $ 11,400 Earnings per share (10,000 shares) $1.14
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Gross Profit Gross Profit (Gross Margin) = Net Sales – Cost of goods sold Gross Profit percentage (rate) = Gross profit / Sales Common size income statement
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Sales Revenue Revenue recognition principle Point of Sale FOB shipping point, FOB destination. Net sales revenue (Contra revenue accounts) Credit card discounts Sales discounts (1/10, n/45) Sales returns and allowances Sales returns involves COGS reversal
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Inventory Company Date Total assets Current assets Inventory Google 12/31/07 25,336 17,289 0 (0.0%) Wal-Mart 1/31/08 163,514 47,585 35,180 (21.5%) Caterpillar 12/31/07 56,132 25,477 7,204 (12.8%) ExxonMobil 12/31/07 242,082 85,963 11,089 (4.6%) All numbers in millions of dollars. The last three companies use the LIFO method, although in Wal-Mart’s case this is approximately the same as FIFO. Wal-Mart measures the cost of inventory using the retail inventory method.
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Inventory Management of Inventory Types of Inventory Merchandise Inventory Raw Materials, Work-in-process, Finished goods Other – Supplies, etc Cost of Merchandise Inventory Purchase price Freight-in Other adjustments
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Inventory Equation (Cost of Goods Sold equation) Cost of goods sold = BI + Purchases – EI (This is the Inventory T-account) Costs IN = Costs OUT (= Cost of goods available for sale) BI + Purchases = COGS + EI
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Inventory Systems Periodic Inventory system: Track costs in (opening inventory and purchases) Count and cost ending inventory to measure cost of goods sold Interim estimates Lack of control over inventory shrinkage Perpetual Inventory system: Real time measurement of cost of goods sold and inventory Positive measure of inventory shrinkage More informative but more costly
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Net purchases Cost of goods purchased: = purchases - purchase returns and allowances – purchase discounts + transport-in All costs to get inventory into a saleable location and condition should be included in inventory. FOB destination, FOB Shipping Note: Transport-out is a selling expense.
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Exercise 5-20: Income Statement for a Merchandiser Fill in the missing amounts in the following income statement for Carpenters Department Store Inc.: Sales revenue $125,600 Less: Sales returns and allowances (a) Net sales $122,040 Cost of goods sold: Beginning inventory 23,400 Purchases (b) Less purchase discounts 1,300 Net purchases (c) Add: Transportation-in 6,550 Cost of goods purchased 81,150 Cost of goods available for sale $104,550 Less ending inventory (e) Cost of goods sold (d) Gross Margin $38,600
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Mgmt 200 Fall 2008 Chap 5 Inventories and COGS -...

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