Accounting Presentation (merchandising activities, inventories and cogs)
Accounting Project For Miss Hina Samdani Group Members: Ahmad Muhamamd Masood Niazi Khalil ur Rehman Maar Mirza Umar Baig Muhammad Awais Munawar Aeysha Akram Hania Ahmad
Contents Merchandising Activities: • Operating Cycle of Merchandising Companies • Income statement of Merchandising Companies • Perpetual and Periodic Inventory Systems Inventories And The Cost Of Goods Sold:• Specific Identification• Average Cost Method• FIFO• LIFO
What is Inventory? “Goods that are purchased for the purpose to resale to customers ” Operating cycle of a Merchandising Company: “The series of transactions through which a business generate its revenue and its cash receipts from consumer.” What is Cost of Goods Sold? “It is the cost which a company pays for making a product or for inventory purchased” What is Goods Available for sale? “ It is the total goods which you could have sold in your interim period of company”
Cash Account InventoryReceivables Sale of Merchandise on Account
Whole Seller & Retailer: Wholesaler buy large quantity of merchandise from several different manufactures and then resell this merchandise to many different retailers. A retailer is a business that sells merchandise directly to the public.
Other Company Merchandising Company Sales Revenue minus Cost of goods minus sold equals Expenses Gross Profit minus equals Other Expenses equals Net Income Net Income
Sales - Cost of goods sold = Gross profitGross Profit - Other Expenses = Net Income ExampleSales $15,000Less : Cost of goods sold (3500)Gross profit $11,500Operating Expenses:Wages Exp 620Adv Exp 150Depreciation Exp 430 (1200)Net Income $10,300
Perpetual System: All Transaction including Costs of merchandise are recorded immediately as they occur. Record is up-to- date all the time. Periodic System: No effort is made to keep records up-to-date neither inventory nor Cost of goods sold and are only updated at the end of interim period.
The following example contains several journal entries used to account for transactions in a perpetual inventory system:Purchase of Merchandise:Purchase of inventory is recorded at cost.To record a purchase of $5,000 of 5 items that are stored in inventory each item has cost $1,000. Account Title Debit CreditInventory $5000 Cash $5000
Sales of Merchandise:Sold 3 items $1200 each, for $3,600. for which the cost is 3,000. Debit CreditCash $3600 Revenue $3600Cost of Goods $3000Sold $3000InventoryGross Profit: 3600 – 3000 = $600Let Expenses are $200. Then,Net Income = 600 – 200 = $400
If inventory is purchased and sold on account, Then entries will be: Purchase of Inventory: (On Account) Account Title Debit CreditInventory $5000 A/C Payable $5000Selling of Inventory: (On Account) Debit CreditA/C Receivables $3600 Revenue $3600 Inventory Record: Debit CreditCost of Goods Sold $3000 Inventory $3000
Payment of A/C Payables to Suppliers: Debit CreditA/C Payables $5000 Cash $5000Collection of Accounts Receivable from Customers: Debit CreditCash $3600 A/C Receivable $3600
Its an alternative to a perpetual inventory systemWhen merchandise is purchased, its cost is debited to an account entitled Purchases.
The inventory on hand at the end of 2011 cost $20000. During 2012, purchases of merchandise for resale of customers totaled $100000 Inventory on hand at the end of 2012 cost $15000.
Recording Purchases of Merchandises:Suppose from total purchases of $100,000 the first purchase was of $10,000 so purchase entry will be: Debit Credit Purchases 10000 Cash 10000
Computing the cost of goods sold:Inventory(beginning of the year 2012)………… $20000Add : Purchases……………………....................100000Cost of goods available for sale………………..$120000Less : Inventory (end of the year 2012)………….15000Cost of goods sold…………………………….$105000
The Cost of Goods Sold is determined using 4 methods1. Specific Identification2. Average Cost3. FIFO (First-in-First-out)4. LIFO (Last-in-First-out)
Specific Identification Method:This method can only be used if the actual costs of individual units of inventory are known.In Perpetual System the cost of goods sold is determined by calculating the cost of each merchandise from invoicesWhile in Periodic System we calculate the cost of each merchandise which we have on hand and deduct it from Cost of goods available for sale in that time period
A company bought 5 units of goods in which 2 @ $500 and3@ $600. And sold 2 units which costed us 1@ $500 and1@ $600.IF Beginning Inventory is zero. Then,B.I= 0, Goods Available for Sale = $1000 + $1800 = $2800Goods on Hand = $500 + $ 1200 = $1700In Perpetual System: Cost of Goods Sold = 500 + 600 = $1100In Periodic System: Cost of Goods Sold = 2800 – 1700 = $1100
“The average cost of all units is taken”Example:A Company bought 5 identical generators at two different rates2 @ $1000 per unit (10th March, 2010)3 @ $1200 per unit (9th May, 2010)Therefore, the generators in inventory, acquired at a total cost of (2000 + 3600)=$5600.Thus the average cost of each generator is 5600/5 = $1120The company sold a generator at $1800 on June 1Let the Beginning entry level of Inventory is zero andinterim period of comp. is semi-annually starting from Jan.
In Perpetual Inventory System:Entries will be of:Purchase:There will be two entriesDate A/C Title Debit Credit10th Mar Inventory $20002010 Cash $20009th May Inventory $36002010 Cash $3600Sale: Debit CreditCash 1800 Revenue/Sale 1800Cost of Goods Sold 1120 Inventory 1120
Purchase Sold BalanceDate Units Unit Total Units Unit Total Units Unit Total Cost Cost Cost10th 2 $1000 $2000 2 $1000 $2000Mar9th 3 $1200 $3600 5 $1120 $5600May1st 1 $1120 $1120 4 $1120 $4480June
In Periodic System:Cost of Goods Sold= Goods Available for sale – Cost of goods on handCost of Goods on hand = Average cost x Remaining units goods = 1120 x 4 = $4480COGS = $5600 - $4480 = $1120
First-In, First-Out Method (FIFO): First merchandise purchased is the first merchandise sold..Last-In, First-Out Method (LIFO)Most recently purchased merchandise (the last in) is assumed to be sold first.
In Perpetual System:Example:A Company bought 5 identical generators at two different rates2 @ $1000 per unit (10th March, 2010)3 @ $1200 per unit (9th May, 2010)Therefore, the generators in inventory, acquired at a total cost of (2000 + 3600)=$5600.The company sold a generator at $1800 on June 1Let the Beginning entry level of Inventory is zero andinterim period of comp. is semi-annually starting from Jan.
In FIFO: We will assume generator which was sold was from purchase of 10th March. And Entry of COGS will be: Date A/C Title Debit Credit 10th COGS $1000 Mar Inventory $1000Date Purchase Sold Total Units Units Total Unit Unit Total Units Unit Total Cost s Cost Cost10th Mar 2 $1000 $2000 2 $1000 $20009th May 3 $1200 $3600 2+3 2 x $1000 (5) 3 x $1200 $56001st Jun 1 $1000 $1000 1+3 1 x $1000 (4) 3 x $1200 $4600
In LIFO: We will assume generator which was sold was from purchase of 9th May. And Entry of COGS will be: Date A/C Title Debit Credit 10th COGS $1200 Mar Inventory $1200Date Purchase Sold Total Units Units Total Units Unit Total Units Unit Cost Total Cost Cost10th Mar 2 $1000 $2000 2 $1000 $20009th May 3 $1200 $3600 2+3 2 x $1000 (5) 3 x $1200 $56001st Jun 1 $1200 $1200 2+2 2 x $1000 (4) 2 x $1200 $4400