Chapter4 Inventory and cost of goods sold SpotlightDanny opened a supermarket named Happy Mall. There are variety kinds of inventories in the supermarket. The merchandise inventory is Happy Mall’s largest asset while the cost of goods sold is the largest expense. How to manage these inventories is the most important issue for the company. However, the cost of the purchase of each batch may be different. The different cost of goods sold may lead to different net income. So how to measure the cost of the inventory sold? How to measure the ending inventory?The management of inventory has significant impact to an entity, especially commercial enterprise. Reasonable inventory management can help the enterprise to calculate the profit and report the assets correctly. Through the control of the inventory, the enterprise can achieve the ultimate goal of inventory management-Improvement of economic benefit.Text1 Classifications of inventoryInventories are also called merchandise inventories. Inventories can include any of the followings:•Finished Goods product•Work in progress being produced•Materials•Purchased goods2 Inventory and cost of goods soldExhibit 4-1Financial statement Account StatusBalance sheet Inventory On handIncome statement Cost of goods sold Sold3 Gross profitFor merchandising firms, an initial step in assessing profitability is gross profit. Gross profit, also called gross margin, is the excess of sales revenue over cost of goods sold. It is the difference between sales revenues and the cost of goods sold.Gross profit= Sales revenue-cost of goods sold4 Accounting for inventoryThere are 2 main types of inventory accounting systems:•Periodic inventory system•Perpetual inventory system4.1 Periodic inventory systemThis system in which the cost of goods sold is computed periodically by relying solely on physical counts without keeping day-to-day records of units sold or on hand.The periodic inventory system does not involve a day-to-day record of inventories or of the cost of goods sold. Instead we compute the cost of goods sold and an updated inventory balance only at the end of an accounting period, when we take a physical count of inventory.Beginning balance+ Newly purchase-Cost of goods sold=Ending balanceCost of goods sold=Beginning balance+ Newly purchase-Ending balanceExhibit 4-2Goods available for sale -Inventory left over = Cost of goods sold 4.2 Perpetual inventory systemIt is a system that keeps a running, continuous record that tracks inventories and the cost of goods sold on a day-to-day basis. The daily record helps managers control inventory levels and prepare interim financial statements. In addition to this continuous record-keeping process, companies periodically physically count and value the inventory.No matter which method a company choose to manage its inventory, it should conduct a physical count at least once a year to check on the accuracy of the continuous record.Journal entry:①Inventory is purchased:Dr: Inventory. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . .XXXCr: Cash. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . XXX②Inventory is soldDr: Cash. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . XXXCr: Sales revenue. . . . . . . . . . . . . . . . . . . . .. . . . .XXXDr: Cost of goods sold. . . . . . . . . . . . . . . . . . . . .. .XXXCr: Inventory. . . . . . . . . . . . . . . . . . . . .. . . . . . . . .XXX5 The various inventory costing methodThere is a challenge to recognize the cost of goods sold. Because the unit price is different every time when purchase inventory.There are four accepted inventory method•Specific identification method•Average cost method•First-in, first out•Last in, first out5.1 Specific identification methodIt is also called specific identification method. Specific identification method concentrates on physically linking the particular items sold with the cost of goods sold that we report. Business cost their inventories at the specific cost of the particular unit. This method is relatively easy to use for expensive, low volume。
会计英语第四版参考答案Chapter 1: Introduction to Accounting1. What is accounting?- Accounting is the systematic recording, summarizing, and reporting of financial transactions and events of a business entity.2. What are the main functions of accounting?- The main functions of accounting are to providefinancial information for decision-making, ensure compliance with laws and regulations, and facilitate the management of a business.3. What are the two main branches of accounting?- The two main branches of accounting are financial accounting and management accounting.4. What is the purpose of financial accounting?- The purpose of financial accounting is to provide an accurate and fair representation of an entity's financial position and performance to external users.5. What is the double-entry bookkeeping system?- The double-entry bookkeeping system is a method of recording financial transactions in which every transactionis recorded twice, once as a debit and once as a credit, to maintain the equality of the accounting equation.Chapter 2: Accounting Concepts and Principles1. What are the fundamental accounting concepts?- The fundamental accounting concepts include the accrual basis of accounting, going concern, consistency, and materiality.2. What is the accrual basis of accounting?- The accrual basis of accounting records transactions when they occur, regardless of when cash is received or paid.3. What is the going concern assumption?- The going concern assumption is the premise that a business will continue to operate for the foreseeable future.4. What is the principle of consistency?- The principle of consistency requires that an entity should apply accounting policies consistently over time.5. What is the principle of materiality?- The principle of materiality states that only items that could potentially affect the decisions of users of financial statements are included in the financial statements.Chapter 3: The Accounting Equation and Financial Statements1. What is the accounting equation?- The accounting equation is Assets = Liabilities +Owner's Equity.2. What are the four main financial statements?- The four main financial statements are the balance sheet, income statement, statement of changes in equity, and cashflow statement.3. What is the purpose of the balance sheet?- The balance sheet provides a snapshot of an entity's financial position at a specific point in time.4. What is the purpose of the income statement?- The income statement reports the revenues, expenses, and net income of an entity over a period of time.5. What is the purpose of the cash flow statement?- The cash flow statement reports the cash inflows and outflows of an entity over a period of time.Chapter 4: Recording Transactions1. What is a journal entry?- A journal entry is the initial recording of atransaction in the general journal.2. What are the steps in the accounting cycle?- The steps in the accounting cycle are analyzing transactions, journalizing, posting, preparing a trial balance, adjusting entries, preparing financial statements, and closing entries.3. What is the difference between a debit and a credit?- A debit is an increase in assets or a decrease inliabilities or equity, while a credit is an increase in liabilities or equity or a decrease in assets.4. What are adjusting entries?- Adjusting entries are made at the end of an accounting period to ensure that revenues and expenses are recorded in the correct period.5. What is the purpose of closing entries?- Closing entries are made to transfer the balances of temporary accounts to the owner's equity account and to prepare the accounts for the next accounting period.Chapter 5: Accounting for Merchandising Businesses1. What is a merchandise inventory?- A merchandise inventory is the stock of goods held by a business for sale to customers.2. What is the cost of goods sold?- The cost of goods sold is the direct cost of producing the merchandise sold during an accounting period.3. What is the gross profit?- The gross profit is the difference between the sales revenue and the cost of goods sold.4. What is the difference between a perpetual and a periodic inventory system?- A perpetual inventory system updates inventory records in real-time with each sale or purchase, while a periodicinventory system updates inventory records at specific intervals, such as at the end of an accounting period.5. What is the retail method of inventory pricing?- The retail method of inventory pricing is a method of estimating the cost of ending inventory by applying a cost-to-retail ratio to the retail value of the inventory.Chapter 6: Accounting for Service Businesses1. What are the main differences in accounting for service businesses compared to merchandise businesses?- Service businesses do not have inventory and their primary expenses are typically labor and overhead costs.2. What is the main source of revenue for service businesses? - The main source of revenue for service businesses is the fees charged for the services provided.3. What are the typical expenses。
