Week 

One (January 4, 2011 – January 10, 2011)

Inventory
 
         Analyze the impact of elements in the cost of goods sold calculation.
         Record the transactions that involve the purchase and sale of merchandise.
         Calculate ending inventory value using the LIFO, FIFO, and average cost
methods.
         Examine the impact of inventory valuation expense using various methods.
 
Course Assignments
 
1.    Readings
 
         Read Ch. 5 (including Appendix 5A) & 6 of Financial Accounting.
         Read this week’s Electronic Reserve Readings.
 
2.    Individual Assignment: Ch. 5 Textbook Exercises (Due Monday January
10, 2011)
 
         Resource: Ch. 5 of Financial Accounting
         Prepare written answers to Exercise E5-15 in Ch. 5.
 
DQ 1 - Due By Thursday 1/6/11
What items make up cost of goods sold?
Both direct and indirect items make up the cost of goods sold. The three main
components include the cost of items purchased for resale, the cost of raw
materials used to produce a product, or the cost of parts and labor used to
assemble a product. Other direct costs may include shipping costs, freight in,
as well as rent and utilities that are directly related to manufacturing a product.

How does beginning and ending inventory affect cost of goods sold?
The cost of goods sold is the difference of the beginning and ending inventory
with the consideration of the cost of goods purchased throughout the year. For
example, a small business may compute their cost of goods sold as the
following:
Beginning inventory $3,000 + cost of goods purchased $870 = goods
available for sale $3,870 – end of year inventory $1,500 = cost of goods sold
$2,370

How does your organization calculate cost of goods sold?

I previously worked for a small construction business that used QuickBooks to
calculate their cost of goods sold using a perpetual inventory system.
What types of companies use periodic inventory?
Companies that may use a periodic inventory system include small
businesses such as “mom and pop” shops that manage operations on a day-
to-day basis.

What types of companies use perpetual inventory?

Companies that may favor perpetual inventory systems include large business
such as grocery and retail stores or any company that sells high valued
merchandise such as vehicles, home furnishings, and major electronics.

DQ 2 - Due by Friday 1/7/11

What are the different inventory cost flow assumptions?
According to Weygandt, Kimmel, and Kieso the four different inventory cost
flow assumptions include:
Specific identification method-- An actual physical flow costing method in
which items still in inventory are specifically costed to arrive at the total cost of
the ending inventory. (p. 250).
Weighted-average unit cost-- Average cost that is weighted by the number of
units purchased at each unit cost. (p. 254).
First-in, first-out (FIFO) method-- Inventory costing method that assumes that
the costs of the earliest goods purchased are the first to be recognized as cost
of goods sold. (p. 252).
Last-in, first-out (LIFO) method-- Inventory costing method that assumes the
costs of the latest units purchased are the first to be allocated to cost of goods
sold. (p. 253).

How does a company determine what cost flow assumption they must use?
A company may determine what cost flow assumption to use by realizing their
desired financial outcome reflected on the income statement and balance
sheet as well as the company’s tax position. For instance, using the first-in,
first-out method will reflect a higher net income and a lower cost of goods
sold. Choosing the last-in, first-out method would present the company with a
decrease in financial taxes.

How might the choice of cost flow assumptions affect the company's cost of
goods sold and ending inventory balance?
The calculation and outcome of each of the different inventory cost flow
assumptions greatly influences the net income and current inventory values
for a company. Each method will not produce the same result; therefore, a
company should remain consistent with their chosen method to accurately
assess trends over time.

DQ 3 - Due by Saturday 1/8/11

How is gross profit computed?
Gross profit is computed by using the following calculation:
Total Revenue – Cost of Goods Sold (COGS) = Gross Profit

Why is gross profit an important measure of profitability?

Gross profit is an important measure of profitability because it demonstrates
the amount of funds a company has available to pay employees, taxes,
operational expenses, and other costs. A company that has a large gross
profit will have more available funds to allocate towards expansion, increase
salaries, or pay out dividends to stockholders.

What is your company’s—or one with which you are familiar—most recent
gross profit rate, and how does it compare to competitors?
To obtain the Gross Profit Margin, gross profit is divided by total revenue.
According to ycharts.com Home Depot currently has a gross profit margin of
34.25%, whereas Lowes has a gross profit margin of 35.05%. Although both
companies are very close in percentages, Lowes higher gross margin
suggests that this company is slightly more efficient in the production and
distribution of its products than Home Depot.

Reference links:
http://ycharts.com/companies/HD/gross_profit_margin
http://ycharts.com/companies/LOW/gross_profit_margin

Summary - Due Monday 1/10/11

Please use this thread to post your weekly summary.  You can include what you already knew,
what you have learned, what you found interesting, and how the materials may be used in your
current job.

I have always found accounting concepts interesting, but sometimes they

have a hard time sticking inside my brain. After reading through our first two
assigned chapters I was pleasantly surprised by how much information I have
been able to retain over the years. In reviewing the cost flow assumptions this
week, I feel like I have gained a stronger understanding then the first time
around in ACC 280. The online ALEKS program is a great tool that provides
additional explanations to some concepts I was having a hard time grasping. I
have enjoyed challenging my current knowledge of journalizing as well as the
financial statements and cannot wait to learn more.