MBA Financial Accounting - Chapter 6

Download MBA Financial Accounting - Chapter 6

Post on 27-Oct-2014

114 views

Category:

Documents

1 download

Embed Size (px)

TRANSCRIPT

Philippine School of Business Administration - Manila

Cost of Sales and Inventories.From Asset to Expense21 July 2012

Introduction of Presenter:

Johann Y. Rosales2 Financial Accounting - Cost of Sales and Inventories 2008 Deloitte & Touche

Introduction of Presenter:

The Younghusbands3 Financial Accounting - Cost of Sales and Inventories 2008 Deloitte & Touche

Audit Life with MDAC Deloitte PH .

4

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

5

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

What is Inventories?PAS 2 defines inventories as follows: Inventories are assets which are held for sale in the ordinary course of business, in the process of production for such sale or in the form of materials or

supplies to be consumed in the production process or inthe rendering of services.

6

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

What is Cost of Sales?is the cost of the services/goods that

was billed or sold to customers.

7

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

Definition of terms: Beginning Inventory Quantities of Merchandise on hand at the beginning of the period

Purchases New Purchases

Available for Sale = Beginning Inventory + Purchases Most that a company can sell during an accounting period

Ending Inventory Remaining Unsold Merchandise

8

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

Types of Companies1.) Merchandising2.) Manufacturing

3.) Service

9

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY- Sells goods in substantially the same physical form as that in which it acquires them. - their goal is to purchase inventory and resell it at a higher price to customers

P 50

P 150

10

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

Merchandise Inventory

11

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY

Inventory- Merchandise inventory - Goods that the company own. - Acquisition cost of the unsold goods

Cost of Goods Sold- The Acquisition cost of the goods that are already sold.

12

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYWhen to include the inventories in the books?F.O.B Destination

F.O.B Shipping Point

But when OWN the When you do you OWN the inventories! inventories?!?2008 Deloitte & Touche

13

Financial Accounting - Cost of Sales and Inventories

MERCHANDISING COMPANYAcquisition CostInvoice Price Cost

Add: Freight - InLess: Purchase Discounts Purchase returns and Allowances Total Cost of Purchase

14

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYCost of goods sold formula Cost of Beginning Inventory Add: Cost of Purchases Cost of Goods Available for Sale Less: Cost of Ending Inventory

Cost of Goods Sold

15

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYBI + N Purchases = Goods Available for Sale = Inventory, End + COGS

Net Purchases

Cost of Goods Sold

Goods Available for Sale (GAS)Beginning Inventory Ending Inventory

Now, how do we split the GAS into Inventory, End and COGS???16 Financial Accounting - Cost of Sales and Inventories 2008 Deloitte & Touche

MERCHANDISING COMPANYSystems for Accounting Inventories

Periodic- Physical count is necessary to determine the ending inventory. - Generally used when the individual inventory items turn over rapidly and have small peso investment.

Perpetual- Physical count is not necessary to determine the ending inventory. - Commonly used where the inventory items treated individually represent a relatively large peso investment.

17

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYSystems for Accounting Inventories

Periodic- Does not keep a running record of all goods bought and sold.

Perpetual- Keeps a running record of all goods bought and sold. Utilizes Perpetual Inventory Card.

18

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY Sample transactions

Systems for Accounting Inventories

Periodic

Perpetual300,000 300,000

1. Purchase of merchandise on account, P300,000. Purchases 300,000 Merchandise Inventory Account Payable 300,000 Account Payable2. Payment of freight on the purchase, P20,000 Freight in Cash 20,000 20,000 Merchandise Inventory Cash

20,000 20,000

orCost of Goods Sold 20,000 Cash 3. Return of merchandise purchsed to supplier, P30,000 Accounts payable 30,000 Accounts payable 30,000 Purchase return 30,000 Merchandise Inventory19 Financial Accounting - Cost of Sales and Inventories

20,000

30,0002008 Deloitte & Touche

MERCHANDISING COMPANY Sample transactions Cont

Systems for Accounting Inventories

Periodic

Perpetual

4. Sale of merchandise on account, P400,000, at 40% gross profit. Accounts receivable 400,000 SAME ENTRY Sales 400,000 Cost of Goods Sold 240,000 Merchandise Inventory 5. Return of merchandise sold from customer, P25,000. Sales return 25,000 SAME ENTRY Accounts receivable 25,000 Merchandise Inventory 15,000 Cost of goods sold 6. Adjustment of ending inventory, P65,000. Merchandise Inventory 65,000 No Entry COGS/IS 65,000

240,000

15,000

20

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY Sample transactions Cont

Systems for Accounting Inventories

Cost of Goods Sold - Periodic MethodPurchase Freight in Purchase return Total Goods Available for Sale Inventory, end Cost of goods sold 300,000 20,000 30,000 290,000 65,000 225,000

Less: Less:

21

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY Sample transactions Cont Cost of Goods Sold - Perpetual MethodMerchandise Inventory 0 Beg. 300,000 Purchases 20,000 Freight in 15,000 Sales return 335,000 335,000 Ending Purchase Returns Sales 65,000 30,000 240,000

Systems for Accounting Inventories

Cost of Goods Sold 240,000 Sales Sales returns 15,000

Balance

225,000

22

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANY Advantages of Perpetual Inventory system 1. Inventory monitoring

Systems for Accounting Inventories

2. Strong system controls3. Availability of Ending Inventory and Cost of Sales balances

23

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

Inventory EstimationAn alternative to physical count

24

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYINVENTORY ESTIMATION TECHNIQUES 1. Retail Inventory Method In this method, purchases are recorded at both their cost and their retail selling price. The gross margin percentage of the goods available for sale is calculated from these records. 2. Gross Profit Method is based on the assumption that the rate of gross profit remains approximately the same from period to period and therefore the ratio of cost of goods sold to net sales is relatively constant from period to period.

25

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYRetail Inventory methodRecords vital for Retail Inventory method: Beginning inventory valued at cost and retail price Purchases during the period at cost and at retail price Adjustments to the original retail price:Additional Markup Markup Cancelation Markdown Cancelation

Markdown

Other adjustmentsDepartmental transfer Breakage Shrinkage Theft

Damaged goodsEmployee discount

26

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYRetail Inventory method Basic FormulaGoods available for sale at ratail or selling price Less: Net Sales (Gross sales minus Sale returns only) Ending Invenory at selling price Multiply by cost ratio xx xx xx xx

Ending Invenory at Cost

xx

Goods available for sale at cost

Cost ratio =

Goods available for sale at selling price

27

Financial Accounting - Cost of Sales and Inventories

2008 Deloitte & Touche

MERCHANDISING COMPANYRetail Inventory method Terminologies1. Initail markup original markup on the cost of goods. 2. Original retail the sales price at which the goods are first offered for sale. 3. Additional markup increase in sales price above the original sales price. 4. Markup cancelation decrease in sales price above the original sales price. 5. Net additional markup or net markup markup minus markup cancelation. 6. Markdown decrease in sales price below the original sales price. 7. Markdown cancelation increase in sales price that does not increase the sales price above the original sales price. 8. Net markdown

Recommended

View more >