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CALCULATION OF COST OF GOODS PURCHASED

PurchasesLess: Purchase returns and allowances

Purchase discounts

Net purchases

Add: Freight-in

Cost of goods purchased

$360,000

10,000

350,000

5,000

355,000

$7,0003,000

CALCULATION OF COST OF GOODS SOLD

Inventory, January 1

Cost of goods purchased

Cost of goods available for sale

Inventory, December 31

Cost of goods sold

$ 40,000

355,000

395,000

50,000

345,000

ILLUSTRATION 6-2COST OF GOODS SOLD

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Net Sales

Cost of Goods Sold

Operating Expenses

Net Income

Purchases=+=

Purchase returns and allowancesPurchase discountsNet purchases

Freight-inCost of goods purchased

Beginning inventory+==

Cost of goods purchasedCost of goods available for saleEnding inventoryCost of goods sold

Net Sales=

Cost of goods soldGross profit

Selling expenses (includingFreight-out)

+=

Administrative expensesTotal operating expenses

Gross profit=

Total operating expensesNet income

Sales=

Sales returns and allowancesSales discountsNet sales

Gross Profit

ILLUSTRATION 6-3COMPONENTS OF THE INCOME STATEMENT FOR AMERCHANDISING COMPANY USING PERIODICINVENTORY SYSTEM

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ILLUSTRATION 6-4COSTING ENDING INVENTORY UNDER FIFO, LIFO,AND AVERAGE COST METHODSPERIODIC SYSTEM

Your company provided the following data for the year:

January 1.....March 15 purchase.....

June 20 purchase.....

October 25 purchase.....

Units and goods available.....

Ending inventory (December 31) consists of 110 units.

Complete the costing of ending inventory under FIFO, LIFO, andaverage cost.

8060

100

90

330

$15.0016.00

17.50

18.00

$1,200960

1,750

1,620

$5,530

Units Unit Cost Total Cost

Cost of goods available for sale.....

LESS: Ending Inventory (FIFO)Dates: Units CostOctober 25 (90 $18.00)

June 20 (20 $17.50)==

$1,620350 1,970

$5,530

FIFO LIFO AVERAGE

$5,530 $5,530

1,680

1,844

LESS: Ending Inventory (LIFO)Dates: Units CostJan 1 (80 $15.00)Mar 15 (30 $16.00)

==

$1,200480

LESS: Ending Inventory (Wt. Aver.)Wt. Aver. cost Units = Unit CostUnit Cost Ending Units

$5,530 330 = $16.76 (r)

$16.76/unit 110 units (r)

Cost of Goods Sold..... $3,560 $3,850 $3,686

Income Statement Effects

Balance

SheetEffects

(r) rounded

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ILLUSTRATION 6-5EFFECTS OF INVENTORY ERRORS

Cost of GoodsSold Net Income

Beginning inventory understated

Beginning inventory overstated

Ending inventory understated

Ending inventory overstated

Understated

Overstated

Overstated

Understated

Overstated

Understated

Understated

Overstated

Inventory Error

SELF-CORRECTING ERRORS OVER TWO PERIODS

CORRECT TOTAL INCOME OVER TWO PERIODS

becomes

offsets

Current Period

An errorseffect on income

this period

EndingInventory

Error

Next Period

BeginningInventory

Error

Reverse effecton net incomein this period

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Net

Sales

Estimated

Gross Profit

Estimated Cost

of Goods Sold =

Step 1

Cost of GoodsAvailable for Sale

Estimated Costof Goods Sold

Estimated Cost ofEnding Inventory

=

Step 2

a. Estimated Gross ProfitRate....40%

Estimate ending inventory costusing the Gross Profit Method.

Net sales $400,000

Less: Estimatedgross profit

(400,000 40% (G)) 160,000

Beginning inventory $ 50,000

(G)

Estimated cost ofending inventory $ 10,000

Step 1:

(G)

Step 2:

Gross Profit Method

G Given

b. Net Sales....$400,000

c. Beginning Inventory....$50,000

d. Goods Purchased....$200,000

Estimated cost ofgoods sold $240,000

Cost of goodspurchased 200,000 (G)

Cost of goodsavailable for sale $250,000

Less: Estimated costof goods sold 240,000

ILLUSTRATION 6-6THE GROSS PROFIT METHOD

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Goods Available

for Sale at Retail

Net

Sales

Ending Inventory

at Retail

Goods Availablefor Sale at Cost

Goods Availablefor Sale at Retail

Cost-to-RetailRatio

Ending Inventoryat Retail

Cost-to-RetailRatio

Estimated Cost ofEnding Inventory

a. Beginning inventory andpurchases at cost and retail

Beg. inv.Purchases

b. Sales at retail....$80,000

Estimate ending inventory costusing the Retail Method.

Cost Retail

$15,00045,000

$25,00075,000

Beg. inv. $15,000 $25,000

Cost Retail

Purchases 45,000 75,000

GoodsAvailable $60,000 100,000

Net salesEstimated inventoryat retail

80,000

$20,000

(G) (G)

(G) (G)

Cost-to-retail ratio$60,000 $100,000 60%

Estimated inventory atcost $20,000 60% $12,000

(G)

Retail Method

G Given

ILLUSTRATION 6-7THE RETAIL INVENTORY METHOD

=

Step 1

=

Step 2

=

Step 3

(1)

(2)

(3)