ACC 131 Seipp Week 9 Lecture Notes: 10/12-10/16
ACC 131 Seipp Week 9 Lecture Notes: 10/12-10/16 ACC 131
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This 4 page Class Notes was uploaded by Daniel Hemenway on Saturday October 17, 2015. The Class Notes belongs to ACC 131 at Illinois State University taught by Edward Seipp in Summer 2015. Since its upload, it has received 28 views. For similar materials see Financial Accounting in Accounting at Illinois State University.
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Date Created: 10/17/15
ACC 131 Seipp 10121016 Chapter 6 Natures of Inventory and Cost of Goods Sold Inventory Products held for resale and is classi ed as a current asset on the balance sheet Cost of Goods Sold When companies sell their inventory to customers the cost of the inventory becomes an expense The out ow of resources caused by the sale of inventory and is the most important expense on the income statement of companies that sell goods instead of services Gross margin or gross pro t is a key performance measure Indicates the extent to which the resources generated by sales can be used to pay operating expenses selling and administrative expenses and provide for net income Revenue Cost of Goods Sold Gross Margin 0 Types of Companies Merchandisers Companies either retailers or wholesalers that purchase in inventory in a nished condition and hold it for resale without further processing 0 Merchandise Inventory The inventory held by merchandisers Retailers Merchandisers that sell directly to consumers Wholesalers Merchandisers that sell to other retailers Manufacturers Companies that buy and transform raw materials into a nished product which is then sold 0 Types of Inventory and Flow of Costs Manufacturing companies classify inventory into three categories m materials workinprocess and nished goods Costs of Goods Sold Model Beginning Inventory Purchases Cost of Goods Available for Sale COGAS Ending Inventory Cost of Goods Sold 0 Types of Inventory Systems Perpetual Cost of Goods Sold updated with each sale Periodic Cost of Goods Sold are recorded only at the end of a period 0 Recording Inventory Transactions Perpetual System ACC 131 Seipp 10121016 The cost of inventory includes the purchase price of the merchandise plus any cost of bringing the goods to salable condition and location 0 Example Shipping Cost Purchases refer to the cost of merchandise acquired for resale during the accounting period The purchase of inventory is recorded by increasing the inventory account Buying Merchandise Merchandise Inventory Cash or Accts Payable 0 Purchase Discounts Purchase Discounts From the viewpoint of the customer when companies that sell goods on credit often offer sales discounts to encourage prompt payment Other end of sales discount The credit terms specify the amount and timing of payments Same as sales 210 n30 Discount Period A period when prompt payment is rewarded by offering a discount 0 Purchase Returns and Allowances Purchase Return The cost of merchandise returned to supplies Purchase Allowance Sometimes the purchaser may choose to keep the merchandise if the seller is willing to grant a deduction allowance from the purchase price 0 Transportation Costs Transportation or freight costs are expenditures made to move the inventory from the seller s location to the purchaser s location The proper recording of transportation costs depends upon whether the buyer or the seller pays for the transportation The point at which ownership or title of the inventory changes hands depends on the shipping terms of the contract Shipping Terms 0 FOB Free On Board FOB shipping point ownership of the inventory passes from the seller to the buyer at the shipping point and the buyer normally pays the transportation costs termed as freightin FOB destination ownership of the inventory passes when the goods are delivered to the buyer and the seller is usually responsible for paying the transportation costs termed as freightout In the perpetual inventory system cost of transportation incurred by the buyer are added to inventory account ACC 131 Seipp 10121016 Consignments Consignment Sometimes goods owned by one party are held and offered for sale by another Original Owner Consignor Retains Ownership Seller Consignee Earns a fee for selling Accounting for Sales of Inventory 91 91 In addition to purchase transactions merchandising companies must also account for the inventory effects of sales and sales returns Because a perpetual inventory system is being used the merchandise inventory account is also affected Sales Companies recognize sales revenue when it is earned and the collection of cash is reasonably assured There are two journal entries Sales revenue is recognized The second journal recognizes the cost of goods that are sold It also reduces the inventory account so that the perpetual inventory system will re ect an uptodate balance for inventory Cash 1000 Sales 1000 Cost of Goods Sold 750 Inventory 750 Sales Returns and Allowances If a customer returns an item for some reason the company will decrease sales by creating a contra revenue account called Sales Returns amp Allowances and decrease accounts receivable or cash In addition the company must make a second entry to decrease cost of goods sold and increase inventory to re ect the return of the merchandise In dealing with sales to customers it is important to remember to record revenues at the selling price and to record eXpenses and inventory at cost Costing Inventory Price is almost always changing Units Sold X Cost Per Unit Cost of Goods Sold An inventory costing method determines how costs are allocated to cost of goods sold and ending inventory There are Four Assumptions ACC 131 Seipp 10121016 Speci c Identi cation FIFO First In First Out 0 LIFO Last In First Out 0 Average Cost Speci c Identi cation Method Determines the cost of ending inventory and the cost of goods sold based on the identi cation of the actual units sold and in inventory It requires that detailed records of each purchase and sale be maintained so that a company knows exactly which items were sold and the cost of those items FirstIn FirstOut FIFO Based on the assumption that costs move through inventory in an unbroken stream with the costs entering and leaving the inventory The earliest purchases the first in are assumed to be the first sold the first out and the more recent purchases are in ending inventory LastIn FirstOut LIFO Allocates the cost of goods available for sale between ending inventory and cost of goods sold based on the assumption that the most recent purchases the last in are the rst to be sold the rst out Under the LIFO method the most recent purchases newest costs are allocated to the cost of goods sold and the earliest purchases oldest costs are allocated to inventory
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