Second Exam Study Guide Cost of Goods Sold The total cost of the product this includes the cost of the product itself and the shipping costs Commonly shortened to COGS Asset Write Off When an asset that doesn t exist is written off from the books Example Stolen inventory Added to the expense section of the income sheet as shrinkage Example When a customer dies before paying for services performed Added to the expense section of income sheet as bad debt Single Step Income Statement 1 Revenue Expenses Net Income Multiple Step Income Statement 1 Sales COGS Gross Margin Profit 2 Gross Margin Profit Selling Administrative Expenses Net Income Product Cost COGS is not recorded until the product has been sold Shipping FOB Shipping Point Ownership of item changes as the shipping point Once the item leaves the shipping point it belongs to the buyer FOB Destination Ownership of the item changes once it reaches it s destination Item belongs to the shipper until it reaches the buyer Perpetual inventory system When all inventory changes are immediately recorded Periodic Inventory COGS is calculated by the difference in the starting inventory and the ending inventory Beginning Inventory Purchases Ending inventory COGS Cash Discounts A discount given to a customer for paying off their balance more quickly Can be recorded in one of two ways N 30 No interest if paid off in the first 30 days 2 10 2 discount if paid in the first 10 days If paid after the discount period has expired it as recorded as interest rather than sales revenue Internal Controls These are meant to protect the assets of the business Cash and Inventory are the most commonly stolen assets Supplier Fraud When a supplier does not deliver the amount of product purchased Cost Flow Assumptions FIFO First in First out income tax LIFO Last in First out income tax Inflation Period of rising prices Deflation Period of lowering prices During inflation will give the highest COGS lowest net income and lowest During deflation will give the highest COGS lowest net income and lowest Cost Behavior Variable Cost changes per unit refers to materials and labor costs which are counted for each time a unit of the product is sold Example It costs 4 to make a 12 pizza Direct materials and labor are always variable Fixed Cost does not change regardless of units sold Example Overhead costs such as rent and utilities Contribution Margin Contributes first to paying off the overhead fixed costs and then to profit Sales Variable cost Contribution Margin Break Even Point Net Income zero Fixed Cost Contribution Margin Break Even Point Target Net Income Fixed Cost Target Net Income Contribution Margin Average Cost Fixed cost per unit decreases as production increases