Comprehensive Inventory and Cost of Goods Sold Concepts in Accounting

What is the beginning Merchandise Inventory value on a worksheet?

It is extended to the Debit column of the Income Statement, as it contributes to the Cost of Goods Sold for the period.

What does a debit balance in the Income Summary account indicate?

It indicates a net loss that decreases owner's equity, meaning expenses and other debits exceed revenues and credits.

Which account normally has a credit balance?

Purchases Returns and Allowances, as it is a contra-expense account that reduces the cost of purchases.

What must a company do upon discovering an inventory shortage at fiscal year-end?

Make an adjusting entry that includes a debit to Inventory Shrinkage and a credit to Merchandise Inventory.

Which account accumulates transportation charges on incoming merchandise under the periodic system?

Freight-in is used to accumulate transportation charges.

What are the three types of inventory found on a manufacturing firm's balance sheet?

Raw Materials, Goods in Process, and Finished Goods.

How is Gross Profit calculated?

Gross Profit, or Gross Margin, is calculated as Net Sales minus Cost of Goods Sold.

How is the cost of spoiled or damaged merchandise recorded in a perpetual system?

It is recorded with a debit to COGS.

What happens when a company makes a credit sale of inventory for $9,000 plus HST using the perpetual method?

The transaction includes a credit to Sales and a debit to Cost of Goods Sold.

What do the terms 2/10, n/30 mean?

A 2% discount is available if paid within 10 days; otherwise, the full amount is due in 30 days.

What is the key difference between a merchandising business and a service business?

A merchandising business generates revenue by selling physical goods, while a service business generates revenue by providing services, with different primary expenses.

What is the journal entry for a company purchasing merchandise for $5,000 plus 13% HST on account with terms 2/10, n/30?

The journal entry would include a debit to Merchandise Inventory and a credit to Accounts Payable.

What is the journal entry for Billy Company selling 50 stereos costing $45 each for $90 each on account?

The entry includes a debit to Accounts Receivable and a credit to Sales for the sale, and a debit to COGS and a credit to Merchandise Inventory for the cost.

What is the purpose of a credit invoice?

A credit invoice is issued for returned goods, affecting the Sales Returns & Allowances and reducing the revenue in the seller's books.

How do you calculate Cost of Goods Sold (COGS) using the periodic method?

COGS is calculated as Beginning Inventory plus Purchases minus Ending Inventory.

What is the difference between direct labour and indirect labour in manufacturing?

Direct labour refers to the cost of workers directly involved in production, while indirect labour refers to costs of workers who support production but do not directly contribute to it.

What is the journal entry for a company buying inventory for $25,000, paying half in cash and the remainder on account?

The entry includes a debit to Merchandise Inventory and credits to Cash and Accounts Payable.

What is the journal entry for a customer returning a defective item sold for $100 plus 13% HST?

The entry includes a debit to Sales Returns & Allowances and a credit to Cash for the refund, and a debit to Merchandise Inventory and a credit to COGS for the cost.

How do you calculate Net Sales?

Net Sales is calculated as Sales minus Sales Returns and Allowances minus Sales Discounts.

How is the Ending Inventory value handled on a worksheet for a merchandising business using the periodic system?

Ending Inventory is recorded as an asset on the balance sheet and is used to calculate COGS for the period.

Contra-expense account

An account that reduces the cost of purchases, typically having a normal credit balance.

Inventory Shrinkage

An accounting entry that reduces the inventory asset account to its actual physical count and records the loss as an expense.

Freight-in

Transportation costs for incoming goods that are included in the Cost of Goods Sold (COGS) calculation.

Types of inventory accounts

Raw Materials, Goods in Process, and Finished Goods represent the different stages of inventory in a manufacturing firm.

Gross Profit

Net Sales minus Cost of Goods Sold, representing the profit before deducting operating expenses.

Cost of Goods Sold (COGS)

The total cost of producing or purchasing the goods that a company sells during a specific period.

Service business

A business that sells services rather than goods, with primary expenses being operating costs.

Merchandising business

A business that buys goods and sells them at a profit, with its largest expense typically being the Cost of Goods Sold (COGS).

Journal entry for invoice payment

Debits Accounts Payable for the full invoice amount, credits Discounts Earned for any discounts, and credits Bank for the final cash paid.

Revenue recording journal entry

Debits Accounts Receivable for total amount, credits Sales and HST Payable, and records the cost with a debit to COGS and a credit to Merchandise Inventory.

Credit invoice

A 'minus' invoice issued by a seller to reverse a charge, typically for returned or defective goods.

Net Purchases calculation

Calculated as Purchases minus Returns and Discounts to determine the total amount available for sale.

Direct labour

Wages for employees directly involved in making finished goods, such as assembly line workers.

Indirect labour

Wages for workers who support the manufacturing process but are not directly involved in production.

Sales Returns & Allowances

Accounts used to record returns and allowances given to customers, affecting the revenue reported.

Net Sales

Calculated as Sales minus Sales Returns & Allowances and Sales Discounts.

Ending inventory value

Determined by a physical count and entered as a credit in the Income Statement and a debit in the Balance Sheet.

Periodic vs. perpetual inventory systems

Periodic systems update inventory balances at specific intervals, while perpetual systems continuously update inventory records.

Gross Profit significance

Indicates the profitability of a merchandising business before operating expenses, calculated from sales revenue.

Handling merchandise returns

Involves recording sales returns and allowances, adjusting inventory, and recognizing any losses.

Terms of sale 1/15, n/60

A cash discount of 1% if paid within 15 days; otherwise, the full amount is due in 60 days.

Terms of sale 2/10, n/30

A cash discount of 2% if paid within 10 days; otherwise, the full amount is due in 30 days.

Cash Discount

A reduction in the bill amount if payment is made by the discount date, encouraging prompt payment.

Cash on Delivery (COD)

Terms of sale where the goods must be paid for at the time they are delivered.

Cash Refund

The return of money to the buyer from the seller when merchandise is returned.

Cost Accounting

A specialized area of accounting that concentrates on determining, controlling, and reporting the costs of doing business.

Cost of Goods Available for Sale (COGAS)

The total cost of beginning inventory plus the net cost of purchases (including freight-in), representing all goods that could have possibly been sold during the fiscal period.

Cost of Goods Manufactured

An amount representing the total cost of all goods produced in a fiscal period, including materials, labor, and overhead.

Cost of Goods Sold Formula

The calculation used to produce the COGS figure for the periodic inventory system: Beginning Inventory + (Purchases + Freight-in) - Ending Inventory = Cost of Goods Sold.

Credit Invoice (Credit Note)

A 'minus' invoice issued by the vendor to reverse a charge that was previously made on a regular sales invoice, often for returned or defective goods.

Discounts Allowed (Sales Discounts)

A revenue reduction account used by the seller to record cash discounts taken by customers for prompt payment.

Discounts Earned (Purchase Discounts)

A cost reduction account used by the buyer to record cash discounts taken for making prompt payment to suppliers.

Duty

Special charges imposed by the government on certain goods imported from a foreign country.

Factory Overhead

A range of expenses that support the manufacturing process but are not direct materials or direct labor.

Goods in Process

Goods that have had some raw materials, direct labor, or overhead applied to them but are not yet finished.

Gross Margin

Another term for Gross Profit.

Manufacturing Business

A business that purchases raw materials and incurs costs to produce a finished good.

Manufacturing Statement

A formal financial statement that calculates the cost of goods manufactured.

Markup

The amount that a merchandising business increases the cost of a good to arrive at a selling price.

Merchandise

Goods bought for the purpose of being sold at a profit.

Merchandise Inventory

The quantity of merchandise on hand, also known as stock-in-trade.

Merchandising

The act of buying goods and selling them at a profit.

Net 30 / Net 60

Terms of sale where the full amount of the invoice is due 30 or 60 days, respectively, after the date of the invoice.

Net Purchases

Purchases minus Purchase Returns & Allowances and Purchase Discounts.

Periodic Inventory System

An inventory system where the cost of inventory sold is determined only at the end of each fiscal period.

Perpetual Inventory System

An inventory system that keeps a detailed record of items in stock on an ongoing basis.

Physical Inventory

A procedure by which the unsold goods of a merchandising business are counted and valued.

Purchases

An expense account used to record the cost of merchandise purchased for resale during a fiscal period.

Purchase Returns and Allowances

A contra-expense account used to record the value of merchandise returned to suppliers.

Raw Materials

An essential component that becomes part of a finished good.

Retailer

A merchandising business that buys goods from wholesalers and manufacturers and sells them to the public.

Sales

The primary revenue account for a merchandising business, recording the selling price of goods sold.

Sales Returns and Allowances

A contra-revenue account used to record the value of merchandise returned by customers.

Stock-in-trade

Another name for Merchandise Inventory.

Terms of Sale

The arrangements made with customers regarding payment for goods or services.

Wholesaler

A merchandising business that buys goods from manufacturers and sells them to retailers.

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