Acct. 221 1st Edition Lecture 8 Outline of Last Lecture I. DEADII. Interesta. Expense and revenue b. Note payable c. How to calculate interest Outline of Current Lecture II. Merchandising Businessesa. Inventoryb. Gross Marginc. Multi-Step Income Statement d. Cost of Goods Sold Current Lecture Chapter 4 Merchandising Businesses Generate revenue by selling goods- The goods are purchased for resale are called merchandise inventory Inventory Tangible property that is held for resale or will be used in producing goods or services - Types: Merchandise (only worry about merchandise for this chapter)  Raw Materials  Work in process Finished goods  Inventory Cost Amount recorded for inventory includes:- Invoice price- Freight charges- Inspection costs- Preparation costs  Inventory consists of product acquired for resale to customers- Often = largest current asset on the balance sheetThese notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute. Inventory becomes and expense when sold  Allocation of Inventory Cost Between Asset and Expense Accounts Beg. Inventory balance + inventory purchased during the period = Cost of Goods Available for Sale  Gross Margin Good indication of how profitable a company is at the most fundamental level Companies with higher gross margins will have more money left over to spend on other business operations (such as research and development or marketing) Most commonly used in manufacturing/merchandising companies and not service  How to calculate:- Sales Revenue – Cost of Goods Sold = Gross Margin  Multi-Step Income Statement  Sales Less: Cost of Goods Sold = Gross Margin or Gross Profit Less: Operating Expenses = Net Income Ex. You bought 100 umbrellas for $6 each and sold 70 of them for $10 each  What is cost of goods sold?- $420 (6*70 = 420) Ex. You bought 100 umbrellas for $6 each and sold 70 of them for $10 each What is your gross profit for the month?- $280 (6*70 = 420 (Cost of Goods Sold) , 10*70=700 (Sales Revenue) , 700-420 = 280 (Gross Profit)) Multi-Step Income Statement  Sales = 700 Less COGS = (420) Gross Margin = 180 Less Operating Expenses = 0 Net Income = $180 Cost of Goods Sold How to Calculate: Beginning inventory Add: Purchases (net) = Goods Available for Sale Deduct: Ending Inventory  =Cost of Goods Sold *Cost of Goods Sold + Ending inventory = available Current asset or liability = used or consumed in 1 yr or less Examples:  Supplies Prepaid’s  Cash  Unearned Revenue  Salary Payable Accounts Receivable Accounts Payable  Long- term asset or liability = used or consumed it for more than a year  Examples: Property Plant Equipment  Note Receivable  Note