Acct 221 1st Edition Lecture 8 Outline of Last Lecture I DEAD II Interest a Expense and revenue b Note payable c How to calculate interest Outline of Current Lecture II Merchandising Businesses a Inventory b Gross Margin c 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 sheet These 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 Payable