DPM_3e_ch07_2003_060310

DPM_3e_ch07_2003_060310 - FINANCIAL ACCOUNTING Third...

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©Cambridge Business Publishers, 2011 Prepared by Diane Tanner Thomas R. Dyckman ■ Robert P. Magee ■ Glenn M. Pfeiffer Third Edition Chapter 7 Chapter 7 Reporting and Reporting and Analyzing Inventory Analyzing Inventory FINANCIAL ACCOUNTING
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©Cambridge Business Publishers, 2011 2 Learning Objective 1 Learning Objective 1 Interpret disclosures of information Interpret disclosures of information concerning operating expenses, concerning operating expenses, including manufacturing and including manufacturing and retail inventory costs. retail inventory costs.
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©Cambridge Business Publishers, 2011 3 Expense Recognition Expense Recognition Direct Association Systematic Allocation Immediate Recognition Matching Principle Requires that expenses be recognized in the same period that the associated revenue is recognized Three Approaches
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©Cambridge Business Publishers, 2011 4 Expense Recognition Expense Recognition Any cost directly associated with a specific source of revenue Recognize at the same time the related revenue is recognized Direct Association Examples Cost of goods sold Warranty costs
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©Cambridge Business Publishers, 2011 5 Expense Recognition Expense Recognition Immediate Recognition Costs that can be associated with the revenues of an accounting period, but not with any specific sales transaction Recognize in period incurred Examples Research and development costs Most marketing costs Most administrative costs including insurance, utilities, salaries, etc.
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©Cambridge Business Publishers, 2011 6 Expense Recognition Expense Recognition Systematic Allocation Costs that benefit more than one accounting period that are not associated with specific revenues or assigned to one specific time period Capitalize as an asset and convert to an expense over its useful life Example Depreciation expense
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©Cambridge Business Publishers, 2011 7 Reporting Inventories Reporting Inventories BJ’S Wholesale Club, Inc. reports the cost of its inventories sold on its income statements: Income Statements Years Ended (in thousands) January 30, 2010 January 31, 2009 Net sales $10,186,981 $10,027,366 Cost of sales 9,080,845 9,003,978 Selling, general and administrative expenses 882,349 802,461 Operating income $ 223,787 $ 220,927 Other expenses…………… One of the largest single expenses in a company’s income statement
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©Cambridge Business Publishers, 2011 8 Inventory Inventory A major asset for most manufacturers and merchandisers When inventory is purchased or produced, it is capitalized and carried on the balance sheet as an asset unit it is sold. When the inventory item is sold, its cost is transferred to cost of goods sold on the income statement. Cost of goods sold is matched against sales revenue to yield gross profit: Sales revenue – Cost of goods sold = Gross profit
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©Cambridge Business Publishers, 2011 9 Inventory Purchasing Inventory Purchasing (1) Phelp’s, Inc., a startup company, purchases 60 pairs of swim goggles for resale at a cost of $4 each.
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DPM_3e_ch07_2003_060310 - FINANCIAL ACCOUNTING Third...

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