COGS & Inv.
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Transcript of COGS & Inv.
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Types of Inventory
MERCHANDISING Wholesalers Buy from
manufacturers
sell to retailer Retailers Buy from wholesalers
Sell to general public
Acctg 101 Merchandise
Inventory
MANUFACTURING Buy from several
suppliers to make aproduct
Sell to wholesalersand sometimesretailers
Acctg 102 Raw Materials
Work in Process
Finished Goods
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Inventory Normal Balance
Inventory is an asset so its normal balance is aDebit.
To increase inventoryDebit
To decrease inventoryCredit
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Purchases Normal Balance
Purchases is like expense
Purchases is always increased with a debit
Purchase returns and allowancescreditbalance
Purchase discountcredit balance
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Cost of Goods Sold (COGS)
Cost of Goods Sold is an expense so it has adebit balance
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Gross Margin
Sales
-Sales Return and Allowances
-Sales Discount
=Net Sales
-Cost of Goods Sold
=Gross Margin
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Cost of Goods Sold
Beginning Inventory 3000 +Purchases 12000 -Purchase Discount -600 -Purchases Return and Allow -400
+ Net Purchases 11000 + Freight In 1000 =Cost of Merchandise Purchased
10000 =Goods Available for Sale 13000 - Ending Inventory (or Goods not Sold) -
4000
= Cost of Goods Sold 9000
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Brief Exercise 6-3 page 281
Exercise 6-1 page 283
MUST KNOW THIS FORMULA
MEMORIZE IT
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Estimating Inventory-Whyimportant
Sales 150,000
Beginning Inventory 8,000 +Purchases 110,000
-Purchase Discount (1,000)
-Purchases Ret & Allow (2,000)
+ Net Purchases 107,000
Goods Available for Sale 115,000
- Ending Inventory (or Goods not Sold) 15,000 = Cost of Goods Sold 100,000
Gross Margin 50,000
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Overstating/UnderstatingEnding Inventory
Over Under
SALES 150 150
Beg Inventory + Net Purchases Cant Change
=Goods Available 115 115
- Ending Inventory 20 10 = COGS 95 105
=Gross Margin 55 45
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WHAT EVER I DO TO
ENDING INVENTORY,
I ALSO DO TO NET
INCOME
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Two methods to TRACKinventory
Periodic
At some period of time
Perpetual
All the time--- everytime there is a purchase andeverytime there is a sale
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IF YOU KNOWPERIODIC YOU WILLKNOW PERPETUAL
SO LETS DO PERIODICFIRST
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COST
OF ENDING INVENTORY Specific Indentification First in First Out
Last In First Out
Average Cost
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Specific Indentification
Not estimated
Actual items
Or specific identification
Page 252 example
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Last In First Out
COOKIE JAR
Last one purchased first one sold Page 253 Used if want to put replacement cost in Cost of
Goods sold Increasing costs --- higher cost in COGS Lower cost in Ending Inventory so lower net
income BE 6-5 pg 281 IFRSNot used UStax savings
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LIFO RESERVE
Additional amount of inventory a companywould report if it used FIFO instead of LIFO
Cost of Goods Sold
Inventory
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MUST BE CONSISTENT
Cant change inventory methods without IRS
approval.
Can use different type of methods for differenttypes of inventory
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Average Cost
Weighted Average 500@$10, 600@$11,800@$12
$50+$66+$96= 212/19 = $11.16
Used if a lot of little inventory items
BE 6-6 page 281
Costs are evenly distributed in COGS and
Ending Inventory
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Periodic versus Perpetual
Have been using Periodic
Perpetual uses the periodic method every timethere is a sale and every time there is a sale.
Perpetual needs exact dates it was purchasedand sold.
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Recording inventorytransactions Periodic Method
Purchase Purchase
A/P
Sale A/R Sales
Return & Allowance A/P
Purchase Ret and Allowance
Purchase Discount A/P
Cash
Purchase Discount
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Perpetual Method Purchase
Inventory
A/P
Sale
A/R Sales
COGS
Inventory
Return & Allowance A/P
Inventory
Purchase Discount A/P
Cash
Inventory
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Purchase Purchase
A/P
Sale A/R
Sales
Return & Allowance A/P
Purchase Ret and Allowance
Purchase Discount A/P
Cash
Purchase Discount
Purchase Inventory
A/P
Sale A/R
Sales
COGS
Inventory
Return & Allowance A/P
Inventory
Purchase Discount A/P
Cash
Inventory
Periodic Perpetual
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Freight - In
Freight In
Purchases or COGS account
Bringing it into the business
Freight In
A/P
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Freight out
Selling Expense
Cost of Sending it to the customer
Freight Expense
Cash or A/P
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Exercises
6-6 pg 284 Perpetual
6-7 Periodic
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Lower Cost or Market pg 266
Normally Inventory is replacement cost --- costto restock the item after identical items aresold
If Market Value is less than Cost (if what youpaid for the item is less than you can sell it for)
you must make an adjustment. COGS
Inventory
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Exercises
Page 285
6-11
6-12
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Inventory Ratios
Inventory Turnover pg 269 COGS/ Average Inventory
# of Days in Inventory365/ Inventory T/O (Seasons)
6-13 pg 285 Inventory
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Gross Profit Ratio
Gross Profit pg 271Gross Profit/ Net Sales
Exercise 6-14 pg 286
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Homework
Problem 6-2 COGS, Ending Inventory
Problem 6-3 Periodic
Problem 6-4 Perpetual
Problem 6-6 Lower of Cost or Market
Problem 6-8 Ratios