13-1
Operating Operating ActivitiesActivities
Operating Operating ActivitiesActivities
Electronic Presentation by Douglas Cloud
Pepperdine University
Electronic Presentation by Douglas Cloud
Pepperdine University
Chapter Chapter F13F13
13-2
1. Identify the purpose and major components of the income statement.
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.
ObjectivesObjectivesObjectivesObjectives
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
Once you have Once you have completed this chapter, completed this chapter, you should be able to:you should be able to:
ContinuedContinuedContinuedContinued
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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.
ObjectivesObjectivesObjectivesObjectives
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11ObjectiveObjectiveObjectiveObjective
Identify the purpose and major components of an income statement.
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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.
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
Non-operating income or gains are Non-operating income or gains are added, to compute pretax income.added, to compute pretax income.
Non-operating income or gains are Non-operating income or gains are added, to compute pretax income.added, to compute pretax income.
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
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For the Year Ended December 31, 2005 2004Net 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
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.
Exhibit 1Exhibit 1Exhibit 1Exhibit 1 Income Statement for Mom’s Cookie Company
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22Explain and apply rules for measuring revenues and receivables and reporting revenue transactions.
ObjectiveObjectiveObjectiveObjective
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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
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Revenues and ReceivablesRevenues and ReceivablesRevenues and ReceivablesRevenues and Receivables
1. The selling company has completed most of the activities necessary to produce and sell the goods or services.
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.
Revenue should be recognized when four criteria have
been met.
Revenue should be recognized when four criteria have
been met.
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Recognizing Revenue for Recognizing Revenue for Long-Term ContractsLong-Term Contracts
Recognizing Revenue for Recognizing Revenue for Long-Term ContractsLong-Term Contracts
Constructo, Inc. contracts to
construct a new building for $20
million.
Constructo, Inc. contracts to
construct a new building for $20
million.The project will take three
years. Constructo, Inc. estimates at the end of
2004, the first year of the contract, 20 percent of the work has been completed.
The project will take three years. Constructo, Inc. estimates at the end of
2004, the first year of the contract, 20 percent of the work has been completed.
For the fiscal period ending in 2004,
Constructo, Inc. will recognize revenue of $4
million (20% of $20 million).
For the fiscal period ending in 2004,
Constructo, Inc. will recognize revenue of $4
million (20% of $20 million).
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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.
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).
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
Mom’s Cookie Company sells goods priced at $5,000 to a customer on November 4, 2004,
and offers a 2% discount if the customer pays in full within 10 days of the purchase.
Mom’s Cookie Company sells goods priced at $5,000 to a customer on November 4, 2004,
and offers a 2% discount if the customer pays in full within 10 days of the purchase.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
11/4 Accounts Rec. 5,000Sales Revenue 5,000
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
If the customer pays within the discount period, the company reduces the revenue by
$100 ($5,000 x 2%) and records the discount.
If the customer pays within the discount period, the company reduces the revenue by
$100 ($5,000 x 2%) and records the discount.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
11/4 Cash 4,900Sales Discount –100Accounts Rec. –5,000
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
ReturnsReturns
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.
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
Textbook Publishing Company sells $5 million of books during fiscal year 2004.
Textbook Publishing Company sells $5 million of books during fiscal year 2004.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Sales Returns –500,000Allowance for Returns –500,000
From past experience, the company estimates that $500,000 of its 2004 sales
will be returned in 2005.
From past experience, the company estimates that $500,000 of its 2004 sales
will be returned in 2005.
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
A major principle of accounting is the
matching principle.
A major principle of accounting is the
matching principle.
MATCHING
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
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.
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
Textbook Publishing received a return of $100,000 (sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
Textbook Publishing received a return of $100,000 (sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/12 Allowance forReturns 100,000Accounts Rec. –100,000
ContinuedContinuedContinuedContinued
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Sales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and ReturnsSales Discounts and Returns
Textbook Publishing received a return of $100,000 (sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
Textbook Publishing received a return of $100,000 (sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
1/12 Merchandise Inventory 75,000Cost of Goods Sold 75,000
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Mom’s Cookie Company has a balance in Allowance for Doubtful Accounts of $1,000
at the end of its 2004 fiscal year before adjustments are made for the year.
Mom’s Cookie Company has a balance in Allowance for Doubtful Accounts of $1,000
at the end of its 2004 fiscal year before adjustments are made for the year.
Management evaluates the company’s credit sales and outstanding receivables and
determines that the amount of the allowance account should be $5,000.
Management evaluates the company’s credit sales and outstanding receivables and
determines that the amount of the allowance account should be $5,000.
Uncollectible AccountsUncollectible AccountsUncollectible AccountsUncollectible Accounts
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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.
Uncollectible AccountsUncollectible AccountsUncollectible AccountsUncollectible Accounts
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
12/31 Doubtful Accounts Exp. –4,000Allowance for Doubtful Accts. –4,000
Doubtful Doubtful AccountsAccounts
ExpenseExpense is a is a selling expenseselling expense
Doubtful Doubtful AccountsAccounts
ExpenseExpense is a is a selling expenseselling expense
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On February 12, 2005, Mom’s Cookie Company determines that $800 owed by
Home Goods Company cannot be collected.
On February 12, 2005, Mom’s Cookie Company determines that $800 owed by
Home Goods Company cannot be collected.
Uncollectible AccountsUncollectible AccountsUncollectible AccountsUncollectible Accounts
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
2/12 Accounts Receivable –800Allowance for Doubtful Accts. 800
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Warranty 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.
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Warranty CostsWarranty Costs
From sales in March, 2004, Harris Company estimates warranty costs of $12,000 will be
incurred in April, May, and June.
From sales in March, 2004, Harris Company estimates warranty costs of $12,000 will be
incurred in April, May, and June.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
3/31 Warranty Expense –12,000Warranty Obligations 12,000
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Warranty CostsWarranty Costs
On May 15, Harris replaces a faulty motor on an appliance. The cost of the motor is $300 and the
cost of labor to install the motor is $100.
On May 15, Harris replaces a faulty motor on an appliance. The cost of the motor is $300 and the
cost of labor to install the motor is $100.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
5/15 Warranty Obligations –400Parts Inventory –300Wages Payable 100
13-31
33Describe reporting rules for inventories and cost of goods sold and compare reporting of inventories for merchandising and manufacturing companies.
ObjectiveObjectiveObjectiveObjective
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Exhibit 3Exhibit 3Exhibit 3Exhibit 3 The Effect of Inventory Transactions on the Financial Statements
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On May 4, 2004, Mom’s Cookie Company purchased $10,000 of inventory on credit.
On May 4, 2004, Mom’s Cookie Company purchased $10,000 of inventory on credit.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
5/4 Merchandise Inventory 10,000Accounts Payable 10,000
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
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On May 6, Mom’s Cookie Company sold $4,000 of that inventory.
On May 6, Mom’s Cookie Company sold $4,000 of that inventory.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
5/6 Cost of Goods Sold –4,000Merchandise Inventory –4,000
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
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On May 12, Mom’s Cookie Company pays for half of the inventory purchase.On May 12, Mom’s Cookie Company
pays for half of the inventory purchase.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date AccountsCash
Other Assets
ContributedCapital
RetainedEarnings
5/12 Accounts Payable –5,000Cash –5,000
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
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Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
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.
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Raw Materials
Raw Materials
Work-in-Process
Work-in-Process
Labor and Overhead
Costs
Labor and Overhead
Costs
Finished Goods
Finished Goods
Exhibit 4Exhibit 4Exhibit 4Exhibit 4 Components of Manufacturing Inventory
Inventories
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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
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
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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.
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Manufacturing
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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.
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Reporting Inventories and Reporting Inventories and Cost of Goods SoldCost of Goods Sold
Manufacturing
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Exhibit 5Exhibit 5Exhibit 5Exhibit 5 Computation of Manufacturing Inventory Costs
13-42
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.
ObjectiveObjectiveObjectiveObjective
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Hydro Company sells and services agricultural
irrigation equipment. On March 20, 2004, 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, 2004, Hydro
purchased 20 pump motors at $200 each. Hydro
already had 8 identical motors on hand, for which
it had paid $175.
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
On March 22, 2004, 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, 2004, a customer purchased one
motor. Should the company record the cost of goods sold for the motor as
$175 or as $200?
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8 units @ $175 per unitMar. 1 Sold 17 units @ $175 per unit
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out Method
20 units @ $200 per unitMar. 20
Using the first-in, first-out method, the 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, the cost of the motor sold would be recorded as $175 because $175 is the cost of the
oldest item in Hydro’s inventory.
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8 units @ $175 per unitMar. 1Sold 1
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out Method
20 units @ $200 per unitMar. 20 19 units @ $200 per unit
Using last-in, first-out, 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 last-in, first-out, 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.
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Using the weighted-average method, Hydro would record the cost of the
motor sold on March 22 as $192.86.
Using the weighted-average method, Hydro would record the cost of the
motor sold on March 22 as $192.86.
8 units @ $175 per unit = $1,400Mar. 1
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Weighted-Average Method
20 units @ $200 per unit = 4,000Mar. 20
28 units $5,400$192.86 per unit
$5,400 $5,400 ÷ 28 units÷ 28 units$5,400 $5,400 ÷ 28 units÷ 28 units
13-48
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Mom’s Cookie Company has finished goods inventory of $3,000 at the end of
February 2005. The inventory includes 150 cases of cookies at a cost of $20 per case. Exhibit 6 (Slide 49) summarizes unit costs
and sales for the company for March.
Mom’s Cookie Company has finished goods inventory of $3,000 at the end of
February 2005. The inventory includes 150 cases of cookies at a cost of $20 per case. Exhibit 6 (Slide 49) summarizes unit costs
and sales for the company for March.
13-49
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 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
Exhibit 6Exhibit 6Exhibit 6Exhibit 6 Unit Costs and Sales for Mom’s Cookie Company for March
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
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
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
3,000 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit Sold allSold all0 units @ $20.00 per unit
Sold 5,200 units on March 20
Beg. Inv.
13-52
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
3,000 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
0 units @ $20.00 per unit
Sold allSold all0 units @ $20.30 per unit
Sold 5,200 units on March 20
Beg. Inv.
13-53
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
3,000 units @ $20.60 per unit
Mar. 8
Mar. 18
0 units @ $20.30 per unit
0 units @ $20.00 per unit
Sold 2,050Sold 2,050950 units @ $20.60 per unit
Sold 5,200 units on March 20
Beg. Inv.
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
950 units @ $20.60 per unit
Mar. 8
Mar. 18
0 units @ $20.30 per unit
0 units @ $20.00 per unit = $ 0
= 0
= 19,570
Ending inventory = $19,570
Beg. Inv.
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
Purchased 3,000 units at $20.90 per unit on March 28
150 units @ $20.00 per unit
950 units @ $20.60 per unit
Mar. 8
Mar. 18
0 units @ $20.30 per unit
Mar. 28 3,000 units @ $20.90 per unit
0 units @ $20.00 per unit
950 units @ $20.60 per unit
Beg. Inv.
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
Sold 3,600 units on March 31
150 units @ $20.00 per unit
950 units @ $20.60 per unit
Mar. 8
Mar. 18
Mar. 28
0 units @ $20.30 per unit
3,000 units @ $20.90 per unit
0 units @ $20.00 per unit
Sold 950Sold 950950 units @ $20.60 per unit0 units @ $20.60 per unit
Beg. Inv.
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Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
950 units @ $20.60 per unit
Mar. 8
Mar. 18
Mar. 28
0 units @ $20.30 per unit
3,000 units @ $20.90 per unit
0 units @ $20.00 per unit
Sold 2,650Sold 2,650
950 units @ $20.60 per unit0 units @ $20.60 per unit
350 units @ $20.90 per unit
Sold 3,600 units on March 31
Beg. Inv.
13-58
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
First-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
950 units @ $20.60 per unit
Mar. 8
Mar. 18
Mar. 28
0 units @ $20.30 per unit
350 units @ $20.90 per unit
0 units @ $20.00 per unit
950 units @ $20.60 per unit0 units @ $20.60 per unit
= $ 0
= 0
= 0
Ending inventory = $7,315
= 7,315
Beg. Inv.
13-59
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
3,000 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
Sold allSold all
Sold 5,200 units on March 20
0 units @ $20.60 per unit
Beg. Inv.
13-60
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
0 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
Sold 2,200Sold 2,200
Sold 5,200 units on March 20
800 units @ $20.30 per unit
Beg. Inv.
13-61
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unitBeg. Inv.
0 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
800 units @ $20.30 per unit
= $ 3,000
= 16,240
= 0
Ending inventory = $19,240
13-62
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
0 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
800 units @ $20.30 per unit
Mar. 28 3,000 units @ $20.90 per unit
Purchased 3,000 units on March 28
Beg. Inv.
13-63
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
0 units @ $20.60 per unit
Mar. 8
Mar. 18
800 units @ $20.30 per unit
150 units @ $20.00 per unit
Mar. 28 3,000 units @ $20.90 per unit0 units @ $20.90 per unit
Sold 3,600 units on March 31
Sold allSold all
Beg. Inv.
13-64
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Last-In, First-Out MethodPerpetual Inventory System
150 units @ $20.00 per unit
0 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
800 units @ $20.30 per unit
Mar. 28 0 units @ $20.90 per unit
Sold 3,600 units on March 31
Sold 600Sold 600200 units @ $20.30 per unit
Beg. Inv.
13-65
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
150 units @ $20.00 per unit
0 units @ $20.60 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
150 units @ $20.00 per unit
200 units @ $20.30 per unit
Mar. 28 0 units @ $20.90 per unit
= $3,000
= 4,060
= 0
Ending inventory = $7,060
= 0
Beg. Inv.
Last-In, First-Out MethodPerpetual Inventory System
13-66
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Average Inventory MethodPerpetual Inventory System
150 units @ $20.00 per unit150 units @ $20.00 per unit
Mar. 8 3,000 units @ $20.30 per unit3,000 units @ $20.30 per unit
= $ 3,000
= 60,900
= 61,800
$125,700
3,000 units @ $20.60 per unitMar. 18
Mar. 20 Average cost $20.439
$125,700 ÷ 6,150 units
Beg. Inv.
13-67
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
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
Sold 5,200 units on March 20
Mar. 20 950 units @ $20.439 per unit
Average Inventory MethodPerpetual Inventory System
13-68
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
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
3,000 units @ $20.90 per unitMar. 28
Mar. 28 3,950 units @ $20.789 per unit
$82,117 ÷ 3,950 units
Average Inventory MethodPerpetual Inventory System
13-69
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
150 units @ $20.00 per unitMar. 20 3,950 units @ $20.789 per unit
Sold 3,600 units on March 31
–3,600 units @ $20.789 per unitMar. 31
Mar. 31 350 units @ $20.789 per unit
= $82,117
= 74,841
$ 7,276
Last-In, First-Out MethodPerpetual Inventory System
13-70
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
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 next to me 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 next to me to review how this amount was determined.
13-71
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
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 .
13-72
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
Now, let’s determine the cost of goods sold when using the lifo perpetual inventory method.
Now, let’s determine the cost of goods sold when using the lifo perpetual inventory method.
Cost of goods available for sale $188,400– Ending inventory 7,060Cost of goods sold $181,340
13-73
Measuring InventoryMeasuring InventoryMeasuring InventoryMeasuring Inventory
How about fifo perpetual?How about fifo perpetual?
Cost of goods available for sale $188,400– Ending inventory 7,315Cost of goods sold $181,085
13-74
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.
13-75
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, 2005 FIFO LIFO For the Year Ended December 31, 2005 FIFO LIFO
Exhibit 12Exhibit 12Exhibit 12Exhibit 12 Income Statement for Mom’s Cookie Company Using FIFO and LIFO Inventory Estimation
13-76
Lower of Cost or MarketLower of Cost or MarketLower of Cost or MarketLower of Cost or Market
GAAP require companies to compare the cost 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 cost determined through inventory estimation
methods with the current market cost of the
inventory on hand at the end of the fiscal year.
If current market cost is below the cost resulting
from the use of an estimation method such as FIFO or LIFO, the
inventory must be written down to the current
market costs.
If current market cost is below the cost resulting
from the use of an estimation method such as FIFO or LIFO, the
inventory must be written down to the current
market costs.
13-77
GAAP require companies to compare the cost 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 cost determined through inventory estimation
methods with the current market cost of the
inventory on hand at the end of the fiscal year.
Lower of Cost or MarketLower of Cost or MarketLower of Cost or MarketLower of Cost or Market
If current market cost is below the cost resulting
from the use of an estimation method such as FIFO or LIFO, the
inventory must be written down to the current
market costs.
If current market cost is below the cost resulting
from the use of an estimation method such as FIFO or LIFO, the
inventory must be written down to the current
market costs.
This requirement is known as the lower of cost or market inventory rule.
This requirement is known as the lower of cost or market inventory rule.
13-78
Lower of Cost or MarketLower of Cost or MarketLower of Cost or MarketLower of Cost or Market
Tucker Company acquired $500,000 of merchandise on August 18, 2004. By
December 31, 2004, the end of its fiscal year, it had sold $300,000 of the
merchandise. Tucker estimates that the market value of the remaining inventory
is $140,000 on December 31, 2004.
Tucker Company acquired $500,000 of merchandise on August 18, 2004. By
December 31, 2004, the end of its fiscal year, it had sold $300,000 of the
merchandise. Tucker estimates that the market value of the remaining inventory
is $140,000 on December 31, 2004.
13-79
Lower of Cost or MarketLower of Cost or MarketLower of Cost or MarketLower of Cost or Market
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.
ASSETS =ASSETS = LIABILITIELIABILITIESS
+ OWNERS’ EQUITY+ OWNERS’ EQUITY
Date Accounts CashOther Assets
ContributedCapital
RetainedEarnings
12/31 Loss on Inventory –60,000Merchandise Inventory –60,000
13-80
55Identify routine and nonroutine events that affect a company’s income statement.
ObjectiveObjectiveObjectiveObjective
13-81
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.
13-82
Operating ExpensesOperating ExpensesOperating ExpensesOperating Expenses
Yes, period costs are expensed in the fiscal
period in which they occur.
Yes, period costs are expensed in the fiscal
period in which they occur.
13-83
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
13-84
Discontinued operations, extraordinary items, and accounting changes may appear on a company’s
income statement.
Discontinued operations, extraordinary items, and accounting changes may appear on a company’s
income statement.
Non-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and Losses
13-85
Discontinued operations are product lines or major parts of a company from which the company will no
longer derive income …
Discontinued operations are product lines or major parts of a company from which the company will no
longer derive income …
Non-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and Losses
13-86
…because it has sold or closed the facilities that produced the
product line or that included that part of the company.
…because it has sold or closed the facilities that produced the
product line or that included that part of the company.
Non-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and Losses
13-87
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.
Non-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and Losses
13-88
Non-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and LossesNon-recurring Gains and Losses
A cumulative effect of a change in accounting method is a gain or loss associated with changing accounting methods or adopting
new accounting standards.
A cumulative effect of a change in accounting method is a gain or loss associated with changing accounting methods or adopting
new accounting standards.
13-89
THE ENDTHE END
CCHAPTERHAPTER F13 F13
13-90
13-91
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 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
Exhibit 6Exhibit 6Exhibit 6Exhibit 6 Unit Costs and Sales for Mom’s Cookie Company for March
Return to Slide 70