Merchandising Operations and the Accounting Cycle - Pearson

Panel A
Panel B
Beginning inventory
+ Net purchases
+ Freight in
= Cost of goods available for sale
– Ending inventory
= Cost of goods sold
Beginning
Inventory
Cost of Goods Available for Sale
Ending
Inventory
Net
Purchases
and Freight In
Cost of
Goods Sold
AUSTIN SOUND CENTRE INC.
Income Statement
For the Year Ended December 31, 2004
Purchases of inventory
– Purchase discounts
– Purchase returns and allowances
= Net purchases
It is the residual left when we subtract ending inventory from the cost of goods
available for sale.
Exhibit 5S-3 summarizes the first half of this Supplement by showing Austin
Sound’s net sales revenue, cost of goods sold—including net purchases and freight in—
and gross margin on the income statement for the periodic system. (All amounts are
assumed.)
PANEL A—Detailed Gross Margin Section—Often Required by Management
Sales revenue ........................................................... $169,300
Less: Sales discounts........................................... $ 1,400
Sales returns and allowances ................. 2,000 3,400
Net sales .............................................................. $165,900)
Cost of goods sold:
Beginning inventory........................................... 38,600
Purchases ............................................................. 91,400
Less: Purchase discounts ................................. $3,000
Purchase returns and allowances ......... 1,200 4,200
Net purchases ................................................... 87,200
Freight in ........................................................... 5,200
Cost of goods available for sale ............................. 131,000
Less: Ending inventory.................................... 40,200
Cost of goods sold.................................................... 90,800
Gross margin............................................................. $ 75,100
PANEL B—Summary Gross Margin Section—Most Common in
Annual Reports to Outsiders
Net sales......................... $165,900
Cost of goods sold ........ 90,800
Gross margin................. $ 75,100
EXHIBIT 5S-2
Measuring Cost of Goods
Sold in the Periodic Inventory
System
WORKING IT OUT
Assume:
Purchases ..................... $265,000
Sales............................. 463,000
Gross Margin................ 200,000
Purchase Returns
and Allowances ....... 2,600
Beginning
Inventory .................. 12,000
Sales Returns
and Allowances ....... 4,500
Purchase
Discounts ................. 2,400
Ending Inventory........... ?
Sales Discounts............ 8,500
How much is Ending Inventory?
A: $22,000. (Net sales: $463,000 –
$4,500 – $8,500 = $450,000;
Cost of goods sold: $450,000 –
$200,000 = $250,000;
Ending inventory: $12,000 +
$265,000 – $2,600 – $2,400 –
$250,000 = $22,000).
EXHIBIT 5S-3
Partial Income Statement
Chapter Five Merchandising Operations and the Accounting Cycle 281