13-1 powerpoint presentation by douglas cloud professor emeritus of accounting pepperdine university...

13-1

PowerPoint Presentation by PowerPoint Presentation by Douglas CloudDouglas Cloud

Professor Emeritus of AccountingProfessor Emeritus of AccountingPepperdine UniversityPepperdine University

© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson,

the Star Logo, and South-Western are trademarks used herein under license.

Task Force Image Gallery clip art included in this electronic presentation is used with the

permission of NVTech Inc.

Task Force Image Gallery clip art included in this electronic presentation is used with the

permission of NVTech Inc.

Operating Operating ActivitiesActivities 1313

Financial AccountingA Bridge to Decision MakingA Bridge to Decision Making

Ingram and Albright

6th edition

http://rds.yahoo.com/S=96062883/K=inventory/v=2/SID=w/l=IVI/SIG=123lek8jq/EXP=1132502345/*-http%3A//www.shercosales.com/images/inventory.jpg

13-2

ObjectivesObjectivesObjectivesObjectives

Once you have completed this chapter, you should be able to—

Once you have completed this chapter, you should be able to—

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1. Identify the purpose and major components of the income statement.


ContinuedContinuedContinuedContinued

2. Explain and apply rules for measuring revenues and receivables and reporting revenue transactions.

3. Describe reporting rules for inventories and cost of goods sold and compare reporting of inventories for merchandising and manufacturing companies.

13-4

4. Explain and apply rules for measuring cost of goods sold and inventories and describe the effects of income taxes on the choice of inventory estimation method.


5. Identify routine and nonroutine events that affect a company’s income statement.

13-5

11ObjectiveObjectiveObjectiveObjective

Identify the purpose and major components of an income statement.

13-6

Basic Operating ActivitiesBasic Operating ActivitiesBasic Operating ActivitiesBasic Operating Activities

The income statement reports the results of operating

activities for a fiscal period on an accrual basis.

The income statement reports the results of operating

activities for a fiscal period on an accrual basis.

13-7

For the Year Ended December 31, 2008 2007Net sales revenue $3,235,600 $686,400Cost of goods sold (1,954,300) (457,600)Gross profit 1,281,300 228,800Selling, general and administrative expenses (1,094,700) (148,300)Operating income 186,600 80,500Interest expense (20,400) (4,800)Pretax income 166,200 75,700Income taxes (49,860) (22,710)Net income $ 116,340 $ 52,990

Earnings per share $ 0.29 $ 0.13

Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Favorite Cookie Company

13-8




The first item on the income The first item on the income statement is net sales revenue.statement is net sales revenue.The first item on the income The first item on the income

statement is net sales revenue.statement is net sales revenue.

13-9

2008 2007Net sales revenue $3,235,600 $686,400Cost of goods sold (1,954,300) (457,600)Gross profit 1,281,300 228,800Selling, general and administrative expenses (1,094,700) (148,300)Operating income 186,600 80,500Interest expense (20,400) (4,800)Pretax income 166,200 75,700Income taxes (49,860) (22,710)Net income $ 116,340 $ 52,990



For the Year Ended December 31,

Cost of goods sold is subtracted Cost of goods sold is subtracted from net sales revenue to from net sales revenue to

compute gross profit.compute gross profit.

Cost of goods sold is subtracted Cost of goods sold is subtracted from net sales revenue to from net sales revenue to

compute gross profit.compute gross profit.

13-10



The expenses for marketing and distributing a The expenses for marketing and distributing a company’s products and managing its company’s products and managing its

operations are subtracted from gross profit to operations are subtracted from gross profit to calculate operating income.calculate operating income.

The expenses for marketing and distributing a The expenses for marketing and distributing a company’s products and managing its company’s products and managing its

operations are subtracted from gross profit to operations are subtracted from gross profit to calculate operating income.calculate operating income.



13-11





Non-operating expenses or losses, such as Non-operating expenses or losses, such as Interest Expense, Interest Expense, are subtracted from are subtracted from

operating income to compute pretax income.operating income to compute pretax income.

Non-operating expenses or losses, such as Non-operating expenses or losses, such as Interest Expense, Interest Expense, are subtracted from are subtracted from

operating income to compute pretax income.operating income to compute pretax income.

13-12

Basic Operating ActivitiesBasic Operating ActivitiesBasic Operating ActivitiesBasic Operating Activities

Any non-operating income or gains would be added to operating income to compute

pretax income.

Any non-operating income or gains would be added to operating income to compute

pretax income.

13-13



Income tax expense is Income tax expense is subtracted from pretax income subtracted from pretax income

to calculate net income.to calculate net income.

Income tax expense is Income tax expense is subtracted from pretax income subtracted from pretax income

to calculate net income.to calculate net income.


13-14




Earnings per share is reported on a Earnings per share is reported on a corporate income statement.corporate income statement.

Earnings per share is reported on a Earnings per share is reported on a corporate income statement.corporate income statement.


13-15

Exercise 13-2Exercise 13-2Exercise 13-2Exercise 13-2

Click the button to skip this exercise.If you experience trouble making the button work, type 17 and press “Enter.”

Press “Enter” or left click the mouse for solution.

At December 31, 2007, the general ledger of Hoffman Electric had the account balances shown in Exercise 13-2 in your textbook (page 505). All adjusting entries (except for income taxes at 35%) have been made. The company had 10,400 shares of common stock outstanding during the year. Prepare an income statement in good form.

13-16

Exercise 13-2Exercise 13-2Exercise 13-2Exercise 13-2Hoffman ElectricIncome Statement

Year Ending December 31, 2007Sales revenue $260,772Cost of goods sold 102,690Gross profit 158,082Selling, general, and administrative expenses 92,260Operating income 65,822Interest expense (1,420)Gain on sale of land 4,800Pretax income 69,202Income tax expense 24,221Net income $ 44,981Earnings per share (10,400) $ 4.33

13-17

22Explain and apply rules for measuring revenues and receivables and reporting revenue transactions.

ObjectiveObjectiveObjectiveObjective

13-18

Sales of goods and services to customers

Sales of goods and services to customers

Activity

Operating revenues

Operating revenues

Income Statement

Cash

Accounts Receivable

Cash

Accounts Receivable

Balance Sheet

Cash received

from customers

Cash received

from customers

Statement of Cash Flows

Exhibit 2Exhibit 2Exhibit 2Exhibit 2 The Effect of Sales and Services on the Financial Statements

13-19

Revenue should be recognized when four criteria have

been met.

Revenue should be recognized when four criteria have

been met.

Revenues and ReceivablesRevenues and ReceivablesRevenues and ReceivablesRevenues and Receivables

13-20

Revenues and ReceivablesRevenues and ReceivablesRevenues and ReceivablesRevenues and Receivables

2. The selling company has incurred the costs associated with producing and selling the goods or services or can reasonably measure those costs.

3. The selling company can measure objectively the amount of revenue it has earned.

4. The selling company is reasonably sure that it is going to collect cash from the purchaser.

1. The selling company has completed most of the activities necessary to produce and sell the goods or services.

13-21

Recognizing Revenue for Recognizing Revenue for Long-Term ContractsLong-Term Contracts


Constructo, Inc. contracts to construct a new building for $20 million. The

project will take three years. Constructo estimates at the end of the

first year, 2007, 20 percent of the work has been completed.

Constructo, Inc. contracts to construct a new building for $20 million. The

project will take three years. Constructo estimates at the end of the

first year, 2007, 20 percent of the work has been completed.

13-22

For the fiscal period ending in 2007, Constructo will

recognize revenue of $4 million (20% of $20 million).

For the fiscal period ending in 2007, Constructo will

recognize revenue of $4 million (20% of $20 million).



13-23

Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns

Revenues are reported on the

income statement net of discounts and

expected returns.

Revenues are reported on the

income statement net of discounts and

expected returns.

13-24


A discount is a reduction in the normal sales price to encourage

customers to buy large quantities of goods (a quantity discount) or

to pay their accounts early (a sales discount).

A discount is a reduction in the normal sales price to encourage

customers to buy large quantities of goods (a quantity discount) or

to pay their accounts early (a sales discount).

13-25


Favorite Cookie Company sells goods priced at $5,000 to a customer on

November 4, 2007, and offers a 2% discount if the customer pays in full

within 10 days of the purchase.

Favorite Cookie Company sells goods priced at $5,000 to a customer on

November 4, 2007, and offers a 2% discount if the customer pays in full

within 10 days of the purchase.

13-26


JournalJournal Date Accounts Debits Credits

Nov. 4 Accounts Receivable 5,000 2007 Sales Revenue 5,000

13-27


Effect on Accounting EquationEffect on Accounting Equation

A = L +

11/4 Accounts Receivable +5,000Sales Revenue +5,000

OE CC + RE

13-28


If the customer pays within the discount period, then Favorite Cookie Company reduces the

revenue by $100 ($5,000 x 2%) and records the discount.

If the customer pays within the discount period, then Favorite Cookie Company reduces the

revenue by $100 ($5,000 x 2%) and records the discount.

13-29



Nov. 10 Cash 4,900 2007 Sales Discount 100

Accounts Receivable 5,000

13-30



A = L +

11/10 Cash +4,900Sales Discount –100

Accounts Rec. –5,000

OE CC + RE

13-31


Like sales discounts, sales returns are

subtracted from sales revenues in reporting

net operating revenues on the income

statement.

Like sales discounts, sales returns are

subtracted from sales revenues in reporting

net operating revenues on the income

statement.

ReturnsReturns

13-32


Textbook Publishing Company sells $5 million of books during fiscal year 2007. From past experience, the

company estimates that $500,000 of its 2007 sales will be returned in 2008.

Textbook Publishing Company sells $5 million of books during fiscal year 2007. From past experience, the

company estimates that $500,000 of its 2007 sales will be returned in 2008.

13-33

Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns


Dec. 31 Sales Returns 500,000 2007 Allowance for Returns 500,000

13-34



A = L +

12/31 Sales Returns –500,000

Allow. for Return –500,000

OE CC + RE

13-35


A major principle of accounting is the

matching principle.

A major principle of accounting is the

matching principle.

13-36


The matching principle is an effort to match revenues and expenses in the period in which they occur so that revenues, expenses, and net

income are not misstated.

The matching principle is an effort to match revenues and expenses in the period in which they occur so that revenues, expenses, and net

income are not misstated.

13-37


Textbook Publishing received a return of $100,000 (sales price)

on January 12, 2008, from a credit customer. The goods cost

the company $75,000.

Textbook Publishing received a return of $100,000 (sales price)

on January 12, 2008, from a credit customer. The goods cost

the company $75,000.

13-38



Jan. 12 Allowance for Returns 100,000 2008 Accounts Receivable 100,000Jan. 12 Merchandise Inventory 75,000 2008 Cost of Goods Sold 75,000

13-39



A = L +

1/12 Allow. for Returns +100,000

Accounts Receivable –100,000

1/12 Merchandise Inventory +75,000

Cost of Goods Sold +75,000

OE CC + RE

13-40

Favorite Cookie Company has a balance in Allowance for Doubtful Accounts of $1,000

at the end of its 2007 fiscal year before adjustments are made for the year.

Favorite Cookie Company has a balance in Allowance for Doubtful Accounts of $1,000

at the end of its 2007 fiscal year before adjustments are made for the year.

Based on credit sales and outstanding receivables, management determines that

the allowance account should have a $5,000 balance at the end of the fiscal year.

Based on credit sales and outstanding receivables, management determines that

the allowance account should have a $5,000 balance at the end of the fiscal year.

Uncollectible AccountsUncollectible AccountsUncollectible AccountsUncollectible Accounts

13-41

Since the current allowance balance is $1,000, the

allowance account needs to be increased by $4,000.

Since the current allowance balance is $1,000, the

allowance account needs to be increased by $4,000.


13-42


Dec. 31 Doubtful Accounts Expense 4,000 2007 Allowance for Doubtful Accounts 4,000

Uncollectible AccountsUncollectible AccountsUncollectible AccountsUncollectible AccountsDoubtful Doubtful AccountsAccounts

ExpenseExpense is a is a selling expenseselling expense

Doubtful Doubtful AccountsAccounts

ExpenseExpense is a is a selling expenseselling expense

13-43



A = L +

12/31 Doubtful Accts. Exp. –4,000 Allowance for

Doubtful Accts. –4,000

OE CC + RE

13-44

On February 12, 2008, Favorite Cookie Company determines that

$800 owed by Home Goods Company cannot be collected.

On February 12, 2008, Favorite Cookie Company determines that

$800 owed by Home Goods Company cannot be collected.


13-45



Feb. 12 Allowance for Doubtful Accounts 800 2008 Accounts Receivable 800

13-46



A = L +

2/12 Allowance for Doubtful Accounts +800

Accts.Receivable –800

OE CC + RE

13-47

Warranty CostsWarranty CostsWarranty CostsWarranty Costs

Products under warranty allow the

customer to return a defective product for

replacement or refund.

Products under warranty allow the

customer to return a defective product for

replacement or refund.

13-48


From sales in March, 2007, Harris Company estimates expected warranty costs of $12,000 will be incurred in

April, May, and June to repair and replace defective parts.

From sales in March, 2007, Harris Company estimates expected warranty costs of $12,000 will be incurred in

April, May, and June to repair and replace defective parts.

13-49



Mar. 31 Warranty Expense 12,000 2007 Warranty Obligation 12,000

13-50


A = L +

3/31 Warranty Expense –12,000Warranty Oblig. +12,000

OE CC + RE


13-51


On May 15, Harris replaces a faulty motor on an appliance. It cost $300 for the motor and $100 for the labor to install the motor.

On May 15, Harris replaces a faulty motor on an appliance. It cost $300 for the motor and $100 for the labor to install the motor.

13-52


May 15 Warranty Obligation 400 2007 Parts Inventory 300

Wages Payable 100


13-53


A = L +

5/15 Warranty Obligation –400 Parts Inventory –300

Wages Payable +100

OE CC + RE


13-54




Goodman Company sold merchandise during its 2007 fiscal year. The total sales price of the merchandise was $30 million. Because of quantity sales discounts, the company billed its customers $29.1 million for the merchandise. Goodman sells goods to retailers who have a right to return the merchandise within 90 days if it does not sell. Goodman expects a return rate of 6% of the amount sold. How much revenue should Goodman recognize in 2007?

13-55


Amount of gross sales $30,000,000Sales discounts 900,000Amount billed 29,100,000Expected returns* 450,000Net sales revenue $28,650,000

*25% x $30,000,000 gross sales x 6% = $450,000

The amount of revenue recognized should be net of discounts and expected returns. The net amount is the amount of cash a

company expects to receive eventually from its customers. Only 3 months (25%) worth of sales are still returnable, and

of those, 6% are expected to be returned.

13-56

33Describe reporting rules for inventories and cost of goods sold and compare reporting of inventories for merchandising and manufacturing companies.


13-57

Exhibit 3Exhibit 3Exhibit 3Exhibit 3 The Effect of Inventory Transactions on the Financial Statements

13-58

On May 4, 2007, Favorite Cookie Company purchased

$10,000 of inventory on credit.

On May 4, 2007, Favorite Cookie Company purchased

$10,000 of inventory on credit.

Merchandising CompaniesMerchandising CompaniesMerchandising CompaniesMerchandising Companies

On May 6, Favorite Cookie Company sold

$4,000 of that inventory.

On May 6, Favorite Cookie Company sold

$4,000 of that inventory.

13-59


May 4 Merchandise Inventory 10,000 2007 Accounts Payable 10,000May 6 Cost of Goods Sold 4,000 2007 Merchandise Inventory 4,000


13-60


A = L +

5/4 Merchandise Inventory +10,000

Accounts Payable +10,000

5/6 Cost of Goods Sold –4,000

Merchandise Inven. –4,000

OE CC + RE


13-61


On May12, Favorite Cookie Company pays for for half of the inventory

purchased on May 4.

On May12, Favorite Cookie Company pays for for half of the inventory

purchased on May 4.

13-62


May 12 Accounts Payable 5,000 2007 Cash 5,000


13-63


A = L +

5/12 Accounts Payable –5,000Cash. –5,000

OE CC + RE


13-64

Purchase discounts for paying for goods and services within the

discount period should result in both Inventory and Accounts

Payable being reduced.

Purchase discounts for paying for goods and services within the

discount period should result in both Inventory and Accounts

Payable being reduced.


13-65

Exhibit 4Exhibit 4Exhibit 4Exhibit 4 Components of Manufacturing Inventory

Raw Materials

Raw Materials

Labor and Overhead

Costs

Labor and Overhead

Costs

Finished Goods

Finished Goods

Work-in-Process

Work-in-Process

Inventories

13-66

Raw materials inventory includes the costs of

component parts or ingredients that become part of the product

being manufactured.

Raw materials inventory includes the costs of

component parts or ingredients that become part of the product

being manufactured.

Manufacturing CompaniesManufacturing CompaniesManufacturing CompaniesManufacturing Companies

13-67

Work-in-process inventory includes the costs of materials, labor, and overhead that have been applied to products that

are in the process of being manufactured.

Work-in-process inventory includes the costs of materials, labor, and overhead that have been applied to products that

are in the process of being manufactured.


13-68

Finished goods inventory includes the costs of products

that have been completed in the manufacturing process and are available for sale to customers.

Finished goods inventory includes the costs of products

that have been completed in the manufacturing process and are available for sale to customers.


13-69

Exhibit 5Exhibit 5Exhibit 5Exhibit 5 Computation of Manufacturing Inventory Costs

13-70

44Explain and apply rules for measuring cost of goods sold and inventories and describe the effects of income taxes on the choice of inventory estimation method.


13-71

Hydro Company sells and services agricultural irrigation equipment. On March 20, 2007, Hydro purchased 20

pump motors at $200 each. Hydro already had 8 identical motors on hand,

for which it had paid $175.

Hydro Company sells and services agricultural irrigation equipment. On March 20, 2007, Hydro purchased 20

pump motors at $200 each. Hydro already had 8 identical motors on hand,

for which it had paid $175.

Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory

13-72

On March 22, 2007, a customer purchased one

motor. Should the company record the cost of goods sold for the motor as

$175 or as $200?

On March 22, 2007, a customer purchased one

motor. Should the company record the cost of goods sold for the motor as

$175 or as $200?


13-73

8 units @ $175 per unitMar. 1Sold one

3/227 units @ $175 per unit

20 units @ $200 per unitMar. 20

Using the first-in, first-out method (FIFO), the units acquired first are assumed to be

sold first. Cost of the motor sold would be recorded as $175 because $175 is the cost of

the oldest item in Hydro’s inventory.

Using the first-in, first-out method (FIFO), the units acquired first are assumed to be

sold first. Cost of the motor sold would be recorded as $175 because $175 is the cost of

the oldest item in Hydro’s inventory.


13-74

8 units @ $175 per unitMar. 1Sold one

3/2220 units @ $200 per unitMar. 20 19 units @ $200 per unit

Using the last-in, first-out method (LIFO), the last units of inventory acquired are

assumed to be sold first. Hydro would record the cost of the motor sold on March 22 as $200 because $200 is the cost of the most

recent item in Hydro’s inventory.

Using the last-in, first-out method (LIFO), the last units of inventory acquired are

assumed to be sold first. Hydro would record the cost of the motor sold on March 22 as $200 because $200 is the cost of the most

recent item in Hydro’s inventory.


13-75

The weighted-average method uses the average cost of units of inventory

available during a period as the cost of units sold. Hydro would record the cost

of the motor sold on March 22 as $192.86 ($5,400 ÷ 28).

The weighted-average method uses the average cost of units of inventory

available during a period as the cost of units sold. Hydro would record the cost

of the motor sold on March 22 as $192.86 ($5,400 ÷ 28).

8 units @ $175 per unit = $1,400Mar. 1

20 units @ $200 per unit = 4,000Mar. 20

28 units $5,400$192.86 per unit


13-76


The weighted average method is sometimes referred to as the

moving average method when the perpetual system is used.

The weighted average method is sometimes referred to as the

moving average method when the perpetual system is used.

13-77

Perpetual and Periodic Perpetual and Periodic Inventory MethodsInventory Methods


Perpetual inventory system refers to a system of recording

cost of goods sold and updating inventory balances at the time

goods are sold.

Perpetual inventory system refers to a system of recording

cost of goods sold and updating inventory balances at the time

goods are sold.

13-78



Periodic inventory system refers to a system of recording

cost of goods sold and updating inventory balances at the end of

a fiscal period.

Periodic inventory system refers to a system of recording

cost of goods sold and updating inventory balances at the end of

a fiscal period.

13-79

March 1 Inventory 150 $20.00$ 3,000

March 8 Batch 3,000 20.3060,900

March 18 Batch 3,000 20.6061,800

March 20 Sales 5,200March 28 Batch 3,000 20.90

62,700March 31 Sales 3,600

Total Cost of Goods Available for Sale

$188,400


March 8 Batch 3,000 20.3060,900

March 18 Batch 3,000 20.6061,800


62,700March 31 Sales 3,600


$188,400

Exhibit 6Exhibit 6Exhibit 6Exhibit 6 Unit Costs and Sales for Favorite Cookie Company for March

13-80

First-In, First-Out (FIFO) Method

Inventory purchased on March 8 and March 18

Beg. Inv.

3,000 units @ $20.60 per unitMar. 18

Mar. 8 3,000 units @ $20.30 per unit

150 units @ $20.00 per unit

Perpetual SystemPerpetual SystemPerpetual SystemPerpetual System

13-81


3,000 units @ $20.60 per unit

Mar. 8

Mar. 18


150 units @ $20.00 per unit Sold allSold all0 units @ $20.00 per unit

Sold 5,200 units on March 20

Beg. Inv.



13-82



Mar. 8

Mar. 18



Sold allSold all0 units @ $20.30 per unit


Beg. Inv.



13-83



Mar. 8

Mar. 18



Sold 2,050Sold 2,050950 units @ $20.60 per unit


Beg. Inv.



13-84



Mar. 8

Mar. 18


0 units @ $20.00 per unit = $ 0

= 0

= 19,570

Ending inventory = $19,570

Beg. Inv.



13-85

Purchased 3,000 units at $20.90 per unit on March 28



Mar. 8

Mar. 18





Beg. Inv.



13-86




Mar. 8

Mar. 18

Mar. 28




Sold 950Sold 950950 units @ $20.60 per unit0 units @ $20.60 per unit

Beg. Inv.



13-87



Mar. 8

Mar. 18

Mar. 28




Sold 2,650Sold 2,650

950 units @ $20.60 per unit0 units @ $20.60 per unit



Beg. Inv.



13-88



Mar. 8

Mar. 18

Mar. 28





= $ 0

= 0

= 0


= 7,315

Beg. Inv.



13-89



Mar. 8

Mar. 18



Sold allSold all



Beg. Inv.


Last-In, First-Out (LIFO) Method

13-90



Mar. 8

Mar. 18



Sold 2,200Sold 2,200



Beg. Inv.



13-91

150 units @ $20.00 per unitBeg. Inv.


Mar. 8

Mar. 18




= $ 3,000

= 16,240

= 0




13-92



Mar. 8

Mar. 18





Purchased 3,000 units on March 28

Beg. Inv.



13-93



Mar. 8

Mar. 18



Mar. 28 3,000 units @ $20.90 per unit0 units @ $20.90 per unit


Sold allSold all

Beg. Inv.



13-94



Mar. 8

Mar. 18




Mar. 28 0 units @ $20.90 per unit


Sold 600Sold 600200 units @ $20.30 per unit

Beg. Inv.



13-95



Mar. 8

Mar. 18





= $3,000

= 4,060

= 0


= 0

Beg. Inv.



13-96

Weighted Average Method


Mar. 8 3,000 units @ $20.30 per unit3,000 units @ $20.30 per unit

= $ 3,000

= 60,900

= 61,800

$125,700


Mar. 20 Average cost $20.439

$125,700 ÷ 6,150 units

Beg. Inv.


13-97

150 units @ $20.00 per unitMar. 20 6,150 units @ $20.439 per unit

Mar. 20 3,000 units @ $20.30 per unit–5,200 units @ $20.439 per unit

= $125,700

= 106,283

$ 19,417





13-98

150 units @ $20.00 per unitMar. 20 950 units @ $20.439 per unit = $19,417

= 62,700

$ 82,117

Purchased 3,000 units on March 28 at $20.90 per unit





13-99

150 units @ $20.00 per unitMar. 20 3,950 units @ $20.789 per unit


–3,600 units @ $20.789 per unitMar. 31


= $82,117

= 74,841

$ 7,276



13-100

To determine cost of goods sold, we need to recall the amount for cost of

goods available for sale, which is $188,400. Click the button below to

review how this amount was determined.

To determine cost of goods sold, we need to recall the amount for cost of

goods available for sale, which is $188,400. Click the button below to

review how this amount was determined.


13-101

Regardless of the inventory method used, the cost of

goods available for sale is the same amount .

Regardless of the inventory method used, the cost of

goods available for sale is the same amount .


13-102

Cost of goods available for sale $188,400– Ending inventory 7,315Cost of goods sold $181,085


Now, let’s determine the cost of goods sold when using the FIFO

perpetual inventory method.

Now, let’s determine the cost of goods sold when using the FIFO

perpetual inventory method.

13-103

Cost of goods available for sale $188,400– Ending inventory 7,060Cost of goods sold $181,340


How about the cost of goods sold for LIFO perpetual?

How about the cost of goods sold for LIFO perpetual?

13-104

Inventory Estimation Inventory Estimation and Income Taxesand Income Taxes

Inventory Estimation Inventory Estimation and Income Taxesand Income Taxes

The primary reason for the use of LIFO is the tax advantage that

LIFO provides to many companies.

The primary reason for the use of LIFO is the tax advantage that

LIFO provides to many companies.

13-105

Sales revenues $3,235,600 $3,235,600 Cost of goods sold (1,946,800) (1,954,300) Gross profit 1,288,800 1,281,300 Selling, general, and admin. exp. (1,094,700) (1,094,700) Operating income 194,100 186,600 Interest expense (20,400) (20,400)Pretax income 173,700 166,200Income tax (52,110) (49,860)Net income $ 121,590 $ 116,340

For the Year Ended December 31, 2008 FIFO LIFO For the Year Ended December 31, 2008 FIFO LIFO

Exhibit 12Exhibit 12Exhibit 12Exhibit 12 Income Statement for Favorite Cookie Company Using FIFO and LIFO Inventory Estimation

13-106

Lower of Cost or MarketLower of Cost or MarketLower of Cost or MarketLower of Cost or Market

GAAP require companies to compare the costs determined through inventory estimation

methods with the current market cost of the inventory on hand at

the end of the fiscal year.

GAAP require companies to compare the costs determined through inventory estimation

methods with the current market cost of the inventory on hand at

the end of the fiscal year.

13-107


If current market costs of the inventories are below the costs

resulting from the use of an estimation method such as FIFO or

LIFO, the inventories must be written down to the current market costs. This requirement is referred to as the lower of cost or market

inventory rule.

If current market costs of the inventories are below the costs

resulting from the use of an estimation method such as FIFO or

LIFO, the inventories must be written down to the current market costs. This requirement is referred to as the lower of cost or market

inventory rule.

13-108


Tucker Company acquired $500,000 of merchandise on August 18, 2007. By

December 31, 2007, the end of its fiscal year, it had sold $300,000 of the merchandise.

Tucker estimates that the market value of the remaining $200,000 of merchandise is

$140,000 on December 31, 2007.

Tucker Company acquired $500,000 of merchandise on August 18, 2007. By

December 31, 2007, the end of its fiscal year, it had sold $300,000 of the merchandise.

Tucker estimates that the market value of the remaining $200,000 of merchandise is

$140,000 on December 31, 2007.

13-109


In keeping with the lower of cost or market rule, Tucker must

recognize a $60,000 loss for its inventory at the end of the year.

In keeping with the lower of cost or market rule, Tucker must

recognize a $60,000 loss for its inventory at the end of the year.

13-110


Dec. 31 Loss on Inventory 60,000 2007 Merchandise Inventory 60,000


13-111


A = L +

12/31 Loss on Inventory –60,000Merchandise Inv. –60,000

OE CC + RE


13-112

Modified Exercise 13-15Modified Exercise 13-15Modified Exercise 13-15Modified Exercise 13-15



Dickinson Company is a wholesaler of garden supplies. At the beginning of the year, the company owned 100 bags of Power-Gro lawn fertilizer at a cost of $8 per bag. Before the spring gardening season, it purchased its entire supply of Power-Gro for the year, 500 bags at $8.30 each and 400 bags at $8.50 each. During the year, it sold 880 bags for $12 each. Calculate the ending inventory using (a) FIFO, (b) LIFO, and (c) weighted-average.

13-113


Beginning inventory (100 units @ $8.00)100 unitsPurchased : 500 units @ $8.30 400 units @ $8.50 900Sold (880)Ending inventory 120 units

(a) FIFO ending inventory = $1,020120 units x $8.50


13-114


Beginning inventory (100 units @ $8.00)100 unitsPurchased : 500 units @ $8.30 400 units @ $8.50 900Sold (880)Ending inventory 120 units

(b) LIFO ending inventory = $966(100 x $8.00) + (20 x $8.30)


13-115


Beginning inventory (100 units @ $8.00) $ 800Purchased : 500 units @ $8.30 4,150 400 units @ $8.50 3,400Cost of goods available for sale $8,350

(c) Weighted-average ending inventory = $1,002120 (see Slide 13-104) x $8.35

Average cost per unit $8.35$8,350 ÷1,000 units

13-116

55Identify routine and nonroutine events that affect a company’s income statement.


13-117

Operating ExpensesOperating ExpensesOperating ExpensesOperating Expenses

Most operating expenses other than cost of goods

sold are period costs.

Most operating expenses other than cost of goods

sold are period costs.

Period costs are expensed in the fiscal period in

which they occur.

Period costs are expensed in the fiscal period in

which they occur.

13-118

Use of Resources in

Operating Activities

Use of Resources in

Operating Activities

ActivityIncome

Statement

Operating Expenses

Operating Expenses

Balance Sheet

Assets –Current Assets

Liabilities +Current

Liabilities

Assets –Current Assets

Liabilities +Current

Liabilities

Cash PaidCash Paid

Statement of Cash Flows

Exhibit 13Exhibit 13Exhibit 13Exhibit 13 The Effect of Period Costs on the Financial Statements

13-119

Discontinued operations are product lines or major parts of a company from which the

company will no longer derive income because it has sold or closed the facilities

that produced the product line or that included that part of the company.

Discontinued operations are product lines or major parts of a company from which the

company will no longer derive income because it has sold or closed the facilities

that produced the product line or that included that part of the company.

Nonrecurring Gains and LossesNonrecurring Gains and LossesNonrecurring Gains and LossesNonrecurring Gains and Losses

13-120

Extraordinary items are gains or losses that are both unusual and infrequent for a

particular company.

Extraordinary items are gains or losses that are both unusual and infrequent for a

particular company.

Nonrecurring Gains and LossesNonrecurring Gains and LossesNonrecurring Gains and LossesNonrecurring Gains and Losses

13-121

THE ENDTHE END

CCHAPTERHAPTER 13 13

13-122

13-123


March 8 Batch 3,000 20.3060,900

March 18 Batch 3,000 20.6061,800


62,700March 31 Sales 3,600


$188,400


March 8 Batch 3,000 20.3060,900

March 18 Batch 3,000 20.6061,800


62,700March 31 Sales 3,600


$188,400

Exhibit 6Exhibit 6Exhibit 6Exhibit 6 Unit Costs and Sales for Favorite Cookie Company for March

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13-1 powerpoint presentation by douglas cloud professor emeritus of accounting pepperdine university...

Documents

net income

companys income statement

net sales revenue

cost of goods

effects of income taxes

operating income186

gross profit1

administrative expenses