Accounting Notes: Sales and Cost of Merchandise

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A.
* Jan 4 acc rec3900
* Sales3900
* Jan 4Cost of merchandise sold2630
* Merchandise inventory2630
Sales 3900
Cost of merchandise sold 2630
Gross profit 1270
Ending inventory 3250
B.
* Jan 4 acc rec3900
* Sales3900
* Jan 4 cost of merchandise sold2660
* Merchandise inventory2660
Sales3900
Cost of merchandise sold2660
Gross profit1240
Ending inventory3220
Inventory system
1. Perpetua: record sales and cost of merchandise sold uses FIFO LIFO 2. Periodic: records sales only FIFO LIFO and average
CMS=MAFS-EI

* Perpetual inventory

* a/r200
* sales200
* CMS80
* Merchandise inventory80

Periodic inventory only sales recorded when inventory is sold. CMS is determined at the end of the accounting period Periodic inventory=physical count of E.I.
100 x 20=2000
80 x 21=1680
100 x22 =2200
280 5880

MAFS=beginning of inventory + net purchases
CMS=MAFS-E.I

A. FIFO
B. AYC
C. LIFO
EI=150 units

FIFO
Jan 10 50x21=$1050
Jan 30 100x22=$2200
150 $3250
MAFS=$5880
EI= (3250)
CMS= 2630

AVC
AVG unit cost= MAFS/total units
$5880/280=$21 per unit
150x21=$3150
5880-3150=2730

LIFO
Jan 1-100 units x 20=2000
Jan 10 -50 x21=1050
150 $3050
MAFS=5880
EI= (3050)
CMS=$2830

Accounting principles (G. A.A.P.)
Principles of conservatism
Inventory generally is based on cost, except when replacement cost is lower than actual cost (Ex. Home purchased in 2004 for $300000 in 2013 inlet value $210000) Report LOCOM or LCM
Lower of cost or market whichever is lower
Unrealized gain
Paper gain
Unrealized loss
Inventory qty.
A. 400$10.259.50410038003800
B. 12022.5024.10270028922700
C. 6008.007.75480046504650
D. 28014.0014.75392041303920
Total155201547215070

Effect of inventory error on the financial statement
Income statement: CMS
Actual inventory: 200000
Error: 175000
Understated by 25000
CMS=MAFS-EI
Understate inventory will overstate merchandise sold ($50000) Will affect gross profit $50000
Net income $50000

The balance sheet: E.I
Current assets $50000
Total assets total asset goes up $50000
Owners’ equity goes up $50000

Study guide
All practice exercises 339/341
EX. 7-7 perputual inventory
FIFO LIFO
343 7-7
Periodic inventory
FIFO LIFO AVC
7-1 retail inventory method
346 ex. 7-22, 23, 24, gross profit method
Problem 7-5ab
Retail inventory and gross profit method

Financial statement analysis and interpretation or inventory Efficient and effective inventory management is measureable
a. (ITO) Inventory turnover- how frequent inventories are bought and sold the more frequent we buy and sell the better the higher the ITO the better ITO= CMS/Ave inventory
b. Number of days sales in inventory (NODSII)-how long we keep the inventory the lower the number of days in inventory is better NODSII=AVE inventory/CMS/365 answer is in days
Inventory destroyed by fire/flood can be estimated for financial statement reporting purpose and for insurance claim
GAAP allows estimate of inventory though the following:
a. Retail method of inventory costing
b. Gross profit method of inventory costing

Chapter: 10 fixed assets and intangible assets
Intangible assets: do not touch
Ex: patients, copyright, trademark, goodwill
Fixed assets we can touch
Ex. Building
Balance sheets: property, plant and equipment
1. Fixed assets is longed lived
2. Has to be used in the normal operation of the business Capital and revenue expenditures
Capital: it benefits current and future periods
1. Asset improvement: adds service life to the fixed assets Ex. Attracted hydric lift
2. Extraordinary repairs: extends the life of the fixed assets Ex. Rebuilt engine
Revenue: benefits this period only
Depreciation...
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