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Periodic System
1. Determine the inventory on hand
Ownership of the goods remains with the seller until the goods reach the buyer.
Prepared by: RCPrado Chapter 9 - 5
In some lines of business, it is common to hold the goods of other parties and try to sell the goods for them for a fee, but without taking ownership of goods. These are called consigned goods.
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Goods in transit purchased FOB shipping point are included in the count. Goods in transit purchased FOB destination are excluded in the count. Goods in transit sold FOB shipping point are excluded in the count. Goods in transit sold FOB destination are included in the count.
1.All merchandise owned by the business is counted 2.Total Cost per Item = Quantity counted/item x cost/unit 3.Total Cost of Inventory = Total Cost per Item
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1. Remove the beginning balance from the merchandise inventory account and to transfer to income summary 2. Record the ending balance in the merchandise inventory and to establish it to the income summary
Methods: Adjusting Entry Method or Closing Entry Method
Prepared by: RCPrado
Chapter 9 - 10
Income Summary xxx Income Summary xxx Merchandise Inventory, Merchandise Inventory, Beginning xxx Beginning xxx Temporary Accounts with Debit Balances xxx
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xxx
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PERIODIC
PERPETUAL
To adjust perpetual inventory records to reflect the results of the year end physical count: Actual < Records No entry Cost of Goods Sold xxx Merchandise Inventory xxx To adjust perpetual inventory records to reflect the results of the year end physical count: Actual > Records No entry Merchandise Inventory xxx Cost of Goods Sold xxx
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INVENTORY ERRORS
Common Cause:
Failure to count or price inventory correctly. Not properly recognizing the transfer of legal title to goods in transit. Errors affect both the income statement and balance sheet.
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INVENTORY ERRORS
Income Statement Effects
Inventory errors affect the computation of cost of goods sold and net income in two periods. An error in ending inventory of the current period will have a reverse effect on net income of the next accounting period. Over the two years, the total net income is correct because the errors offset each other. The ending inventory depends entirely on the accuracy of taking and costing the inventory.
Prepared by: RCPrado Chapter 9 - 18
INVENTORY ERRORS
2008 Incorrect Sales Beginning inventory Cost of goods purchased Cost of goods available Ending inventory Cost of good sold Gross profit Operating expenses Net income $ 80,000 20,000 40,000 60,000 12,000 48,000 32,000 10,000 $ 22,000 Correct $ 80,000 20,000 40,000 60,000 15,000 45,000 35,000 10,000 $ 25,000 2009 Incorrect $ 90,000 12,000 68,000 80,000 23,000 57,000 33,000 20,000 $ 13,000 Correct $ 90,000 15,000 68,000 83,000 23,000 60,000 30,000 20,000 $ 10,000
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Effect of inventory errors on the balance sheet is determined by using the basic accounting equation:.
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NEXT YEAR
Gross Profit, Profit & Owners Equity
Inv, End
COGS
Current Assets
Inv, Beg
COGS
+ -
+ -
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INVENTORY ERRORS
Review Question
Understating ending inventory will overstate: a. assets. b. cost of goods sold.
c. net income.
d. owner's equity.
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a)
b) 3. 4.
Perpetual: COGS
Periodic: Purchases, Purchase Discounts, Purchase Returns and Allowances, Freight-In
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SOURCES OF INCOME
Sale of merchandise to customers - all sales to customers during the period. Sales returns, allowances and discounts should be deducted from gross sales to arrive at net sales Rendering of services - includes professional fees, media advertising commissions, insurance agency commissions, admission fees for artistic performance and tuition fee, among others
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SOURCES OF INCOME
Use of entity resources - includes interest, rent, royalty and dividend income Disposal of resources other than products - gain on sale of investments, gain on sale of property, plant and equipment and gain on sale of intangible assets
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COMPONENTS OF EXPENSE
Cost of sales Distribution of costs or selling expenses Administrative expenses Other expenses Income tax expense
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SELLING EXPENSES
Costs which are directly related to selling, advertising and delivery of goods to customers Include salesmens salaries, sales commissions, traveling and marketing expenses, advertising and publicity expenses, store supplies used, freight out, depreciation of delivery equipment and other expenses related directly with the selling function
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ADMINISTRATIVE EXPENSES
Includes all operating expenses not related to selling expenses and cost of goods sold, such as doubtful accounts, office salaries and expenses of general executives and of the general accounting and credit department, office supplies used, certain taxes, contributions, professional fees, depreciation of office building and office equipment and amortization of intangibles
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OTHER EXPENSES
Expenses not directly related to the selling and administrative function Expenses include charges to income such as loss on sale of trading securities, loss on sale of property, plant and equipment, loss on sale of long-term investments and other losses
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Key Items:
Net sales Gross profit
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Key Items:
Nonoperating activities Net income
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FUNCTIONAL FORMAT
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