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FUA-1 Chapter 1
FUA-1 Chapter 1
FUA-1 Chapter 1
I. Income statement
A. Cost of goods (merchandise) sold =Beginning inventory + Net purchase – Ending inventory
As you see, ending inventory is a deduction in calculating cost of merchandise sold. So, it has an
indirect (negative) relationship to cost of merchandise sold, i.e. if ending inventory is understated,
the cost of merchandise sold will be overstated, and if ending inventory is overstated, the cost of
merchandise sold will be understated.
I. Income Statement
1. Cost of merchandise sold= Beginning inventory + Net Purchases – Ending inventory
As you see, beginning inventory is an addition in determining cost of goods sold. It has direct effect
on cost of merchandise sold. That is, if the beginning inventory is understated (Overstated), the cost
of merchandise sold will be understated (Overstated)
2. Gross Profit= Net Sales – Cost of merchandise sold
The effect of beginning inventory on gross profit is the opposite of the effect on cost of merchandise
sold, i.e. indirect (negative) relationship. If the beginning inventory is understated, the gross profit
will be overstated and if it is overstated, the gross profit will be understated.
3. Net income = Gross Profit – Operating expenses
The effect of beginning inventory on net income is the same as its effect on gross profit.
▪ Periodic ▪ Perpetual
➢ The inventory value and COGS are determined only ➢ Continuous record of both the physical flow and
at important point in time .e.g. end of reporting the cost of inventories and COGS. Every point
period in time you determine the level of inventory
➢ Only revenue is recorded at time of sale ➢ Both revenue and COGS are recorded
➢ Purchase & purchase related accounts are used ➢ No purchase and purchase related accounts
➢ More appropriate for low unit cost items ➢ For high unit cost items (not economical for low
➢ Physical inventory is undertaken to determine EI unit cost items)
cost. Units sold are determined indirectly by ➢ Physical inventory should be undertaken to test
subtracting the units on hand from the sum of the accuracy, to discover any shortage or overage
units available for sale during the period. b/c of waste, breakage , theft, improper entry,
➢ This makes preparation of interim f/sts more costly failure to record acquisitions etc
unless inventory estimation technique is used. ➢ Facilitates the preparation of interim f/sts
➢ Weaker for internal control ➢ Stronger for internal control
Sep.1 Goods were purchased for $10,000 terms 2/10,n/30
Periodic Perpetual
Sep.1 Purchases -------------- 10,000 Sep.1 Merchandise inventory ------ 10,000
Accounts Payable ---- 10,000 Accounts Payable --------- 10,000
Sept. 6 Goods costing $6000 were sold for $10,000 terms 2/10,n/30
Sep.6 Accounts receivable -- 10,000 Sep.6 Accounts receivable ------ 10,000
Sales ----------------- 10,000 Sales ----------------- 10,000
COGS ----------------- 6,000
Merchandise inventory ---- 6,000
Sept. 11 Paid for the September 1 purchases