Chapter 5 Part 2. Businesses take actual count of inventory at least once per year Actual count of...
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Transcript of Chapter 5 Part 2. Businesses take actual count of inventory at least once per year Actual count of...
Chapter 5 Part 2
Businesses take actual count of inventory at least once per year
Actual count of inventory may differ from amount on the books due to:◦ Theft or Damage – Inventory Shrinkage◦ Errors
2Copyright (c) 2009 Prentice Hall. All rights reserved.
GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Cost of goods sold
Inventory
To adjust for shrinkage
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Cost of Goods Sold 300
Inventory 300
Adjustment for shrinkage
$40,500 (per books) -40,200 (physical count) $300 (shrinkage)
Prepare a merchandiser’s financial statements
4Copyright (c) 2009 Prentice Hall. All rights reserved.
Multi-step Single-step
Lists several important subtotals◦ Gross profit◦ Operating income
More popular
Groups all revenue and all expenses together◦ No subtotals
Works well for service companies
Copyright (c) 2009 Prentice Hall. All rights reserved. 5
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Step 1 – Net Sales Revenue
Sales Revenue– Sales Discounts– Sales Returns and Allowances Net Sales Revenue
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Step 2: Gross Profit Net sales- Cost of goods sold
Gross profit
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Step 3: Operating Income
Operating Expenses
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Step 3: Operating Income Net sales Cost of goods sold
Gross profit -Operating expenses
Operating income
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Step 4: Net Income (Loss)
+ Other revenues- Other expenses
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Net sales Cost of goods sold
Gross profit-Operating expenses Operating income
Other revenue and expenseNet income (loss)
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Greg’s Groovy TunesIncome Statement
Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900Cost of Goods Sold (90,800) Gross Profit 75,100Operating Expenses: Wages expense $10,200
Rent expense 8,400 Insurance expense 1,000
Depreciation expense 600Supplies expense 500 20,700
Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100
Multi-step Single-step
Lists several important subtotals◦ Gross profit◦ Operating income
More popular
Groups all revenue and all expenses together◦ No subtotals
Works well for service companies
Copyright (c) 2009 Prentice Hall. All rights reserved. 13
A single-step income statement is one of two commonly used formats for the income statement or profit and loss statement. The single-step format uses only one subtraction to arrive at net income.
Net Income = (Revenues + Gains) – (Expenses + Losses)
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The multiple-step profit and loss statement segregates the operating revenues and operating expenses from the nonoperating revenues, nonoperating expenses, gains, and losses. The multiple-step income statement also shows the gross profit (net sales minus the cost of goods sold).
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Net sales Cost of goods sold Expenses Net income (loss)
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Greg’s Groovy TunesIncome Statement
Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900 Operating Expenses: Cost of goods sold $90,800 Wages expense 10,200
Rent expense 8,400 Interest expense 1,300
Insurance expense 1,000 Depreciation expense 600
Supplies expense 500 Total expense (112,800) Net Income $53,100
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Shows relationship of each item to a base amount on financial statements
Income statement – each item expressed as percentage of net sales
Balance sheet – each item expressed as percentage of total assets
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Percentages based on total revenues:Cost of goods sold: 2010: 90,000/150,000 = 60%
2011: 90,800/165,900 = 54.7%Wages Expenses: 2010: 7,500/150,000 = 5%
2011: 10,200/165,900 = 6.1%
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Percentages based on total revenues:Rent Expense: 2010: 8,400/150,000 = 5.6%
2011: 8,400/165,900 = 5.1%Interest Expense: 2010: 1,500/150,000 = 1%
2011: 1,300/165,900 = .8%
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Percentages based on total revenues:Insurance Expense: 2010: 1,500/150,000 1%
2011: 1,000/165,900 = .6%Depreciation Expense: 2010: 3,000/150,000 = 2%
2011: 1,600/165,900 = .4%
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Percentages based on total revenues:Supplies Expense: 2010: 600/ 150,000 = .4%
2011: 500/165,900 = .3%
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Greg’s Groovy tunes
Comparative Vertical Analysis Income Statement
Years Ended December 31, 2011 and 2010
2011 2010
Net Sales $165,900 100.0% $150,000 100.0%
Cogs 90,800 54.7% 90,000 60% Wages Expense 10,200 6.1 7,500 5
Rent Expense 8,400 5.1 8,400 5.6
Interest Expense 1,300 .8 1,500 1
Insurance Expense 1,000 .6 1,500 1
Depreciation Expense 600 .4 3,000 2 Supplies Expense 500 .3 600 .4 Total Expenses 112,800 68% 112,500 75%Net Income $53,100 32% 37,500 25%
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Greg’s Groovy TunesStatement of Owner’s Equity
Year Ended December 31, 2011Amy Toms, Capital, Dec. 31, 2010
$25,900Net Income
53,100 Subtotal
$88,550Greg Moore, Withdrawals
(54,100)Greg Moore, Capital, Dec. 31, 2011
$24,900
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AssetsCurrent AssetsCash $2,800Accounts Receivable 4,600Inventory 40,200Prepaid Insurance 200Supplies
100 Total Current Assets
$47,900Furniture $33,200Accumulated
depreciation (3,000) 30,200
Total Assets $78.100
LiabilitiesCurrent LiabilitiesAccounts Payable $39,500Unearned Serv. Revenue 700Wages payable 400 Total Current Liabilities
$40,600 Long-term Liabilities: Notes payable
12,600Total Liabilities
53,200Owner’s Equity
Greg Moore, Capital 24,900 Total Liabilities &
Owner’s Equity $78,100
Greg’s Groovy TunesBalance Sheet
December 31, 2011
Use gross profit percentage and inventory turnover to evaluate a business
28Copyright (c) 2009 Prentice Hall. All rights reserved.
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Carefully watched measure
Gross Profit Net Sales
Copyright (c) 2009 Prentice Hall. All rights reserved.
Small increase may indicate rise in
income
Small decrease may indicate
trouble
Copyright (c) 2009 Prentice Hall. All rights reserved. 30
Gross Profit Net Sales
What is Gross Profit? It is what you have left from sales after paying for the cost of making those sales, to pay all other expenses. If your costs of inventory starts to rise and you don’t raise your prices to increase net sales, this ration will start to fall this means your overall profits are being squeezed.
Net SalesLess: Cost of Goods Sold--------------------------------Gross Profit
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Carefully watched measure
Gross Profit-$75,100 Net Sales- $165,900
45.3%
Copyright (c) 2009 Prentice Hall. All rights reserved.
Small increase may indicate rise in
income
Small decrease may indicate
trouble
Cost of goods soldAverage inventory
32Copyright (c) 2009 Prentice Hall. All rights reserved.
Measures how rapidly inventory is sold (To get the amount of cost of goods sold that I did this year, how many times was the amount I kept in inventory replaced?) Because inventory costs money to keep around, the more cost of goods sold I can get from a very small inventory the better.)The higher the turnover, the
more quickly inventory is sold
Cost of goods soldAverage inventory
To get the amount of cost of goods sold that I did this year, how many times was the amount I kept in inventory replaced?) Because inventory costs money to keep around, the more cost of goods sold I can get from a very small inventory the better.
Copyright (c) 2009 Prentice Hall. All rights reserved. 33
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Compute the Rate of Inventory turnover Compute the Rate of Inventory turnover assuming that Groovy Tunes had a 12/31/10 assuming that Groovy Tunes had a 12/31/10
Inventory of $38,600 and a $40,200 Inventory on Inventory of $38,600 and a $40,200 Inventory on 12/31/1112/31/11
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Inventory Turnover:
= $90,800 $(38,600+40,200)/2
= 2.3 timesCost of goods soldAverage inventory
Adjust and close the accounts of a merchandising business
36Copyright (c) 2009 Prentice Hall. All rights reserved.
37
Greg’s Groovy TunesIncome Statement
Year Ended December 31, 2011Sales Revenue $169,300Less: Sales Ret. & Allowances (2,000) Sales Discounts (1,400) (3,400) Net Sales Revenue $165,900Cost of Goods Sold (90,800) Gross Profit 75,100Operating Expenses: Wages expense $10,200
Rent expense 8,400 Insurance expense 1,000
Depreciation expense 600Supplies expense 500 20,700
Operating Income 54,400 Other revenue and (expenses): Interest expense (1,300) Net Income $53,100
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1. Close all income statement accounts with credit balances to Income Summary
2. Close all income statement accounts with debit balances to Income Summary
3. Close Income Summary to Capital4. Close Withdrawals to Capital
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Sales Revenue 169,300
Income Summary 169,300
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1. Close all income statement accounts with credit balances to Income Summary
2. Close all income statement accounts with debit balances to Income Summary
3. Close Income Summary to Capital4. Close Withdrawals to Capital
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GENERAL JOURNAL
DATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Income Summary 116,200
Sales Ret. & Allowances 2,000
Sales Discounts 1,400
Cost of goods sold 90,800 Wages Expense 10,200
Rent Expense 8,400Depreciation Expense 600Insurance Expense 1,000
Supplies Expense 500
Interest Expense 1,300
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1. Close all income statement accounts with credit balances to Income Summary
2. Close all income statement accounts with debit balances to Income Summary
3. Close Income Summary to Capital4. Close Withdrawals to Capital
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Income Summary 53,100
Greg Moore, Capital 53,100
(169,300 – 116,200)
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1. Close all income statement accounts with credit balances to Income Summary
2. Close all income statement accounts with debit balances to Income Summary
3. Close Income Summary to Capital4. Close Withdrawals to Capital
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GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT
Dec 31 Income Summary 53,100
Greg Moore, Capital 53,100
(169,300 – 116,200)
31 Greg Moore Capital 54,100
Greg Moore, Withdrawals 54,100