13-1 PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc. Operating Activities 13 Financial Accounting A Bridge to Decision Making Ingram and Albright 6 th edition

13-2ObjectivesObjectives Once you have completed this chapter, you should be able to—

Identify the purpose and major components of the income statement. ObjectivesObjectives ContinuedContinued 2.Explain and apply rules for measuring revenues and receivables and reporting revenue transactions. 3.Describe reporting rules for inventories and cost of goods sold and compare reporting of inventories for merchandising and manufacturing companies.

Explain and apply rules for measuring cost of goods sold and inventories and describe the effects of income taxes on the choice of inventory estimation method. ObjectivesObjectives 5.Identify routine and nonroutine events that affect a company’s income statement.

13-51 ObjectiveObjective Identify the purpose and major components of an income statement.

13-6 Basic Operating Activities The income statement reports the results of operating activities for a fiscal period on an accrual basis.

13-7 For the Year Ended December 31, Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Exhibit 1 Income Statement for Favorite Cookie Company

13-8 For the Year Ended December 31, Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Exhibit 1 Income Statement for Favorite Cookie Company The first item on the income statement is net sales revenue.

Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Exhibit 1 Income Statement for Favorite Cookie Company For the Year Ended December 31, Cost of goods sold is subtracted from net sales revenue to compute gross profit.

Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 The expenses for marketing and distributing a company’s products and managing its operations are subtracted from gross profit to calculate operating income. Exhibit 1 Income Statement for Favorite Cookie Company For the Year Ended December 31,

Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Exhibit 1 Income Statement for Favorite Cookie Company For the Year Ended December 31, Non-operating expenses or losses, such as Interest Expense, are subtracted from operating income to compute pretax income.

13-12 Basic Operating Activities Any non-operating income or gains would be added to operating income to compute pretax income.

13-13 For the Year Ended December 31, Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Income tax expense is subtracted from pretax income to calculate net income. Exhibit 1 Income Statement for Favorite Cookie Company

Net sales revenue$3,235,600$686,400 Cost of goods sold (1,954,300) (457,600) Gross profit1,281,300228,800 Selling, general and administrative expenses (1,094,700) (148,300) Operating income186,60080,500 Interest expense (20,400) (4,800) Pretax income166,20075,700 Income taxes (49,860) (22,710) Net income$ 116,340$ 52,990 Earnings per share$ 0.29$ 0.13 Exhibit 1 Income Statement for Favorite Cookie Company Earnings per share is reported on a corporate income statement. For the Year Ended December 31,

13-15 Exercise 13-2 Click the button to skip this exercise. If you experience trouble making the button work, type 17 and press “Enter.” Press “Enter” or left click the mouse for solution. At December 31, 2007, the general ledger of Hoffman Electric had the account balances shown in Exercise 13-2 in your textbook (page 505). All adjusting entries (except for income taxes at 35%) have been made. The company had 10,400 shares of common stock outstanding during the year. Prepare an income statement in good form.

13-16 Exercise 13-2 Hoffman Electric Income Statement Year Ending December 31, 2007 Sales revenue$260,772 Cost of goods sold 102,690 Gross profit158,082 Selling, general, and administrative expenses 92,260 Operating income65,822 Interest expense(1,420) Gain on sale of land 4,800 Pretax income69,202 Income tax expense 24,221 Net income$ 44,981 Earnings per share (10,400)$ 4.33

Explain and apply rules for measuring revenues and receivables and reporting revenue transactions. ObjectiveObjective

13-18 Sales of goods and services to customers Activity Operating revenues Income Statement Cash Accounts Receivable Cash Accounts Receivable Balance Sheet Cash received from customers Statement of Cash Flows Exhibit 2 The Effect of Sales and Services on the Financial Statements

13-19 Revenue should be recognized when four criteria have been met. Revenues and Receivables

13-20 Revenues and Receivables 2.The selling company has incurred the costs associated with producing and selling the goods or services or can reasonably measure those costs. 3.The selling company can measure objectively the amount of revenue it has earned. 4.The selling company is reasonably sure that it is going to collect cash from the purchaser. 1.The selling company has completed most of the activities necessary to produce and sell the goods or services.

13-21 Recognizing Revenue for Long-Term Contracts Constructo, Inc. contracts to construct a new building for $20 million. The project will take three years. Constructo estimates at the end of the first year, 2007, 20 percent of the work has been completed.

13-22 For the fiscal period ending in 2007, Constructo will recognize revenue of $4 million (20% of $20 million). Recognizing Revenue for Long-Term Contracts

13-23 Sales Discounts and Returns Revenues are reported on the income statement net of discounts and expected returns.

13-24 Sales Discounts and Returns A discount is a reduction in the normal sales price to encourage customers to buy large quantities of goods (a quantity discount) or to pay their accounts early (a sales discount).

13-25 Sales Discounts and Returns Favorite Cookie Company sells goods priced at $5,000 to a customer on November 4, 2007, and offers a 2% discount if the customer pays in full within 10 days of the purchase.

13-26 Sales Discounts and Returns Journal Journal Date Accounts Debits Credits Nov. 4Accounts Receivable5, Sales Revenue5,000

13-27 Sales Discounts and Returns Effect on Accounting Equation Effect on Accounting Equation A = L + 11/4Accounts Receivable+5,000 Sales Revenue+5,000 OE CC + RE

13-28 Sales Discounts and Returns If the customer pays within the discount period, then Favorite Cookie Company reduces the revenue by $100 ($5,000 x 2%) and records the discount.

13-29 Sales Discounts and Returns Journal Journal Date Accounts Debits Credits Nov. 10Cash4, Sales Discount100 Accounts Receivable5,000

13-30 Sales Discounts and Returns Effect on Accounting Equation Effect on Accounting Equation A = L + 11/10Cash+4,900 Sales Discount–100 Accounts Rec.–5,000 OE CC + RE

13-31 Sales Discounts and Returns Like sales discounts, sales returns are subtracted from sales revenues in reporting net operating revenues on the income statement. Returns

13-32 Sales Discounts and Returns Textbook Publishing Company sells $5 million of books during fiscal year From past experience, the company estimates that $500,000 of its 2007 sales will be returned in 2008.

13-33 Sales Discounts and Returns Journal Journal Date Accounts Debits Credits Dec. 31Sales Returns500, Allowance for Returns500,000

13-34 Sales Discounts and Returns Effect on Accounting Equation Effect on Accounting Equation A = L + 12/31Sales Returns–500,000 Allow. for Return–500,000 OE CC + RE

13-35 Sales Discounts and Returns A major principle of accounting is the matching principle.

13-36 Sales Discounts and Returns The matching principle is an effort to match revenues and expenses in the period in which they occur so that revenues, expenses, and net income are not misstated.

13-37 Sales Discounts and Returns Textbook Publishing received a return of $100,000 (sales price) on January 12, 2008, from a credit customer. The goods cost the company $75,000.

13-38 Sales Discounts and Returns Journal Journal Date Accounts Debits Credits Jan. 12Allowance for Returns100, Accounts Receivable100,000 Jan. 12Merchandise Inventory75, Cost of Goods Sold75,000

13-39 Sales Discounts and Returns Effect on Accounting Equation Effect on Accounting Equation A = L + 1/12Allow. for Returns+100,000 Accounts Receivable–100,000 1/12Merchandise Inventory+75,000 Cost of Goods Sold+75,000 OE CC + RE

13-40 Favorite Cookie Company has a balance in Allowance for Doubtful Accounts of $1,000 at the end of its 2007 fiscal year before adjustments are made for the year. Based on credit sales and outstanding receivables, management determines that the allowance account should have a $5,000 balance at the end of the fiscal year. Uncollectible Accounts

13-41 Since the current allowance balance is $1,000, the allowance account needs to be increased by $4,000. Uncollectible Accounts

13-42 Journal Journal Date Accounts Debits Credits Dec. 31Doubtful Accounts Expense4, Allowance for Doubtful Accounts4,000 Uncollectible Accounts Doubtful Accounts Expense is a selling expense

13-43 Uncollectible Accounts Effect on Accounting Equation Effect on Accounting Equation A = L + 12/31Doubtful Accts. Exp.–4,000 Allowance for Doubtful Accts.–4,000 OE CC + RE

13-44 On February 12, 2008, Favorite Cookie Company determines that $800 owed by Home Goods Company cannot be collected. Uncollectible Accounts

13-45 Uncollectible Accounts Journal Journal Date Accounts Debits Credits Feb. 12Allowance for Doubtful Accounts Accounts Receivable800

13-46 Uncollectible Accounts Effect on Accounting Equation Effect on Accounting Equation A = L + 2/12Allowance for Doubtful Accounts+800 Accts.Receivable–800 OE CC + RE

13-47 Warranty Costs Products under warranty allow the customer to return a defective product for replacement or refund.

13-48 Warranty Costs From sales in March, 2007, Harris Company estimates expected warranty costs of $12,000 will be incurred in April, May, and June to repair and replace defective parts.

13-49 Warranty Costs Journal Journal Date Accounts Debits Credits Mar. 31Warranty Expense12, Warranty Obligation12,000

13-50 Effect on Accounting Equation Effect on Accounting Equation A = L + 3/31Warranty Expense–12,000 Warranty Oblig.+12,000 OE CC + RE Warranty Costs

13-51 Warranty Costs On May 15, Harris replaces a faulty motor on an appliance. It cost $300 for the motor and $100 for the labor to install the motor.

13-52 Journal Journal Date Accounts Debits Credits May 15Warranty Obligation Parts Inventory300 Wages Payable100 Warranty Costs

13-53 Effect on Accounting Equation Effect on Accounting Equation A = L + 5/15Warranty Obligation–400 Parts Inventory–300 Wages Payable+100 OE CC + RE Warranty Costs

13-54 Exercise 13-5 Click the button to skip this exercise. If you experience trouble making the button work, type 56 and press “Enter.” Press “Enter” or left click the mouse for solution. Goodman Company sold merchandise during its 2007 fiscal year. The total sales price of the merchandise was $30 million. Because of quantity sales discounts, the company billed its customers $29.1 million for the merchandise. Goodman sells goods to retailers who have a right to return the merchandise within 90 days if it does not sell. Goodman expects a return rate of 6% of the amount sold. How much revenue should Goodman recognize in 2007?

13-55 Exercise 13-5 Amount of gross sales$30,000,000 Sales discounts 900,000 Amount billed29,100,000 Expected returns* 450,000 Net sales revenue$28,650,000 *25% x $30,000,000 gross sales x 6% = $450,000 The amount of revenue recognized should be net of discounts and expected returns. The net amount is the amount of cash a company expects to receive eventually from its customers. Only 3 months (25%) worth of sales are still returnable, and of those, 6% are expected to be returned.

Describe reporting rules for inventories and cost of goods sold and compare reporting of inventories for merchandising and manufacturing companies. ObjectiveObjective

13-57 Exhibit 3 The Effect of Inventory Transactions on the Financial Statements

13-58 On May 4, 2007, Favorite Cookie Company purchased $10,000 of inventory on credit. Merchandising Companies On May 6, Favorite Cookie Company sold $4,000 of that inventory.

13-59 Journal Journal Date Accounts Debits Credits May 4Merchandise Inventory10, Accounts Payable10,000 May 6Cost of Goods Sold4, Merchandise Inventory4,000 Merchandising Companies

13-60 Effect on Accounting Equation Effect on Accounting Equation A = L + 5/4 Merchandise Inventory+10,000 Accounts Payable+10,000 5/6Cost of Goods Sold–4,000 Merchandise Inven.–4,000 OE CC + RE Merchandising Companies

13-61 Merchandising Companies On May12, Favorite Cookie Company pays for for half of the inventory purchased on May 4.

13-62 Journal Journal Date Accounts Debits Credits May 12Accounts Payable5, Cash5,000 Merchandising Companies

13-63 Effect on Accounting Equation Effect on Accounting Equation A = L + 5/12Accounts Payable–5,000 Cash.–5,000 OE CC + RE Merchandising Companies

13-64 Purchase discounts for paying for goods and services within the discount period should result in both Inventory and Accounts Payable being reduced. Merchandising Companies

13-65 Exhibit 4 Components of Manufacturing Inventory Raw Materials Labor and Overhead Costs Finished Goods Work-in- Process Inventories

13-66 Raw materials inventory includes the costs of component parts or ingredients that become part of the product being manufactured. Manufacturing Companies

13-67 Work-in-process inventory includes the costs of materials, labor, and overhead that have been applied to products that are in the process of being manufactured. Manufacturing Companies

13-68 Finished goods inventory includes the costs of products that have been completed in the manufacturing process and are available for sale to customers. Manufacturing Companies

13-69 Exhibit 5 Computation of Manufacturing Inventory Costs

Explain and apply rules for measuring cost of goods sold and inventories and describe the effects of income taxes on the choice of inventory estimation method. ObjectiveObjective

13-71 Hydro Company sells and services agricultural irrigation equipment. On March 20, 2007, Hydro purchased 20 pump motors at $200 each. Hydro already had 8 identical motors on hand, for which it had paid $175. Measuring Inventory

13-72 On March 22, 2007, a customer purchased one motor. Should the company record the cost of goods sold for the motor as $175 or as $200? Measuring Inventory

13-73 $175 per unit Mar. 1 Sold one 3/22 $175 per unit $200 per unit Mar. 20 Using the first-in, first-out method (FIFO), the units acquired first are assumed to be sold first. Cost of the motor sold would be recorded as $175 because $175 is the cost of the oldest item in Hydro’s inventory. Measuring Inventory

13-74 $175 per unit Mar. 1 Sold one 3/22 $200 per unit Mar. 20 $200 per unit Using the last-in, first-out method (LIFO), the last units of inventory acquired are assumed to be sold first. Hydro would record the cost of the motor sold on March 22 as $200 because $200 is the cost of the most recent item in Hydro’s inventory. Measuring Inventory

13-75 The weighted-average method uses the average cost of units of inventory available during a period as the cost of units sold. Hydro would record the cost of the motor sold on March 22 as $ ($5,400 ÷ 28). $175 per unit = $1,400 Mar. 1 $200 per unit =4,000 Mar units$5,400 $ per unit Measuring Inventory

13-76 Measuring Inventory The weighted average method is sometimes referred to as the moving average method when the perpetual system is used.

13-77 Perpetual and Periodic Inventory Methods Perpetual inventory system refers to a system of recording cost of goods sold and updating inventory balances at the time goods are sold.

13-78 Perpetual and Periodic Inventory Methods Periodic inventory system refers to a system of recording cost of goods sold and updating inventory balances at the end of a fiscal period.

13-79 March 1 Inventory150$20.00$ 3,000 March 8 Batch3, ,900 March 18 Batch3, ,800 March 20 Sales5,200 March 28 Batch3, ,700 March 31 Sales3,600 Total Cost of Goods Available for Sale$188,400 March 1 Inventory150$20.00$ 3,000 March 8 Batch3, ,900 March 18 Batch3, ,800 March 20 Sales5,200 March 28 Batch3, ,700 March 31 Sales3,600 Total Cost of Goods Available for Sale$188,400 Exhibit 6 Unit Costs and Sales for Favorite Cookie Company for March

13-80 First-In, First-Out (FIFO) Method Inventory purchased on March 8 and March 18 Beg. Inv. $20.60 per unit Mar. 18 Mar. 8 $20.30 per unit $20.00 per unit Perpetual System

13-81 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Sold all $20.00 per unit Sold 5,200 units on March 20 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-82 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Sold all $20.30 per unit Sold 5,200 units on March 20 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-83 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Sold 2,050 $20.60 per unit Sold 5,200 units on March 20 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-84 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit =$ 0 = 0 =19,570 Ending inventory =$19,570 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-85 Purchased 3,000 units at $20.90 per unit on March 28 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit Mar. 28 $20.90 per unit $20.00 per unit $20.60 per unit Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-86 Sold 3,600 units on March 31 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 Mar. 28 $20.30 per unit $20.90 per unit $20.00 per unit Sold 950 $20.60 per $20.60 per unit Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-87 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 Mar. 28 $20.30 per unit $20.90 per unit $20.00 per unit Sold 2,650 $20.60 per $20.60 per unit $20.90 per unit Sold 3,600 units on March 31 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-88 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 Mar. 28 $20.30 per unit $20.90 per unit $20.00 per unit $20.60 per $20.60 per unit =$ 0 = 0 =0=0 Ending inventory =$7,315 =7,315 Beg. Inv. Perpetual System First-In, First-Out (FIFO) Method

13-89 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Sold all Sold 5,200 units on March 20 $20.60 per unit Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-90 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Sold 2,200 Sold 5,200 units on March 20 $20.30 per unit Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-91 $20.00 per unit Beg. Inv. $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit $20.30 per unit = $ 3,000 = 16,240 =0=0 Ending inventory =$19,240 Perpetual System Last-In, First-Out (LIFO) Method

13-92 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit $20.30 per unit Mar. 28 $20.90 per unit Purchased 3,000 units on March 28 Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-93 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit Mar. 28 $20.90 per unit $20.90 per unit Sold 3,600 units on March 31 Sold all Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-94 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit $20.30 per unit Mar. 28 $20.90 per unit Sold 3,600 units on March 31 Sold 600 $20.30 per unit Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-95 $20.00 per unit $20.60 per unit Mar. 8 Mar. 18 $20.30 per unit $20.00 per unit $20.30 per unit Mar. 28 $20.90 per unit = $3,000 = 4,060 =0=0 Ending inventory =$7,060 =0=0 Beg. Inv. Perpetual System Last-In, First-Out (LIFO) Method

13-96 Weighted Average Method $20.00 per unit Mar. 8 $20.30 per unit =$ 3,000 =60,900 = 61,800 $125,700 $20.60 per unit Mar. 18 Mar. 20 Average cost $ $125,700 ÷ 6,150 units Beg. Inv. Perpetual System

13-97 $20.00 per unit Mar. 20 $ per unit Mar. 20 $20.30 per unit–5,200 $ per unit =$125,700 = 106,283 $ 19,417 Sold 5,200 units on March 20 Mar $ per unit Perpetual System Weighted Average Method

13-98 $20.00 per unit Mar. 20 $ per unit =$19,417 = 62,700 $ 82,117 Purchased 3,000 units on March 28 at $20.90 per unit $20.90 per unit Mar. 28 3,950 $ per unit Perpetual System Weighted Average Method

13-99 $20.00 per unit Mar. 20 $ per unit Sold 3,600 units on March 31 $ per unit Mar $ per unit =$82,117 = 74,841 $ 7,276 Perpetual System Weighted Average Method

To determine cost of goods sold, we need to recall the amount for cost of goods available for sale, which is $188,400. Click the button below to review how this amount was determined. Perpetual System

Regardless of the inventory method used, the cost of goods available for sale is the same amount. Perpetual System

Cost of goods available for sale$188,400 – Ending inventory 7,315 Cost of goods sold$181,085 Perpetual System Now, let’s determine the cost of goods sold when using the FIFO perpetual inventory method.

Cost of goods available for sale$188,400 – Ending inventory 7,060 Cost of goods sold$181,340 Perpetual System How about the cost of goods sold for LIFO perpetual?

Inventory Estimation and Income Taxes The primary reason for the use of LIFO is the tax advantage that LIFO provides to many companies.

Sales revenues$3,235,600 $3,235,600 Cost of goods sold(1,946,800) (1,954,300) Gross profit1,288,800 1,281,300 Selling, general, and admin. exp.(1,094,700) (1,094,700) Operating income194, ,600 Interest expense (20,400) (20,400) Pretax income173, ,200 Income tax (52,110) (49,860) Net income$ 121,590$ 116,340 For the Year Ended December 31, 2008 FIFO LIFO Exhibit 12 Income Statement for Favorite Cookie Company Using FIFO and LIFO Inventory Estimation

Lower of Cost or Market GAAP require companies to compare the costs determined through inventory estimation methods with the current market cost of the inventory on hand at the end of the fiscal year.

Lower of Cost or Market If current market costs of the inventories are below the costs resulting from the use of an estimation method such as FIFO or LIFO, the inventories must be written down to the current market costs. This requirement is referred to as the lower of cost or market inventory rule.

Lower of Cost or Market Tucker Company acquired $500,000 of merchandise on August 18, By December 31, 2007, the end of its fiscal year, it had sold $300,000 of the merchandise. Tucker estimates that the market value of the remaining $200,000 of merchandise is $140,000 on December 31, 2007.

Lower of Cost or Market In keeping with the lower of cost or market rule, Tucker must recognize a $60,000 loss for its inventory at the end of the year.

Journal Journal Date Accounts Debits Credits Dec. 31Loss on Inventory60, Merchandise Inventory60,000 Lower of Cost or Market

Effect on Accounting Equation Effect on Accounting Equation A = L + 12/31Loss on Inventory–60,000 Merchandise Inv.–60,000 OE CC + RE Lower of Cost or Market

Modified Exercise Click the button to skip this exercise. If you experience trouble making the button work, type 116 and press “Enter.” Press “Enter” or left click the mouse for solution. Dickinson Company is a wholesaler of garden supplies. At the beginning of the year, the company owned 100 bags of Power-Gro lawn fertilizer at a cost of $8 per bag. Before the spring gardening season, it purchased its entire supply of Power-Gro for the year, 500 bags at $8.30 each and 400 bags at $8.50 each. During the year, it sold 880 bags for $12 each. Calculate the ending inventory using (a) FIFO, (b) LIFO, and (c) weighted-average.

Modified Exercise Beginning inventory (100 $8.00)100 units Purchased : 500 $ $ Sold(880) Ending inventory120 units (a)FIFO ending inventory = $1, units x $8.50 ContinuedContinued

Modified Exercise Beginning inventory (100 $8.00)100 units Purchased : 500 $ $ Sold(880) Ending inventory120 units (b) LIFO ending inventory = $966 (100 x $8.00) + (20 x $8.30) ContinuedContinued

Modified Exercise Beginning inventory (100 $8.00)$ 800 Purchased : 500 $8.30 4, $8.50 3,400 Cost of goods available for sale$8,350 (c) Weighted-average ending inventory = $1, (see Slide ) x $8.35 Average cost per unit$8.35 $8,350 ÷1,000 units

Identify routine and nonroutine events that affect a company’s income statement. ObjectiveObjective

Operating Expenses Most operating expenses other than cost of goods sold are period costs. Period costs are expensed in the fiscal period in which they occur.

Use of Resources in Operating Activities Activity Income Statement Operating Expenses Balance Sheet Assets – Current Assets Liabilities + Current Liabilities Assets – Current Assets Liabilities + Current Liabilities Cash Paid Statement of Cash Flows Exhibit 13 The Effect of Period Costs on the Financial Statements

Discontinued operations are product lines or major parts of a company from which the company will no longer derive income because it has sold or closed the facilities that produced the product line or that included that part of the company. Nonrecurring Gains and Losses

Extraordinary items are gains or losses that are both unusual and infrequent for a particular company. Nonrecurring Gains and Losses

T HE E ND C HAPTER 13

13-122

March 1 Inventory150$20.00$ 3,000 March 8 Batch3, ,900 March 18 Batch3, ,800 March 20 Sales5,200 March 28 Batch3, ,700 March 31 Sales3,600 Total Cost of Goods Available for Sale$188,400 March 1 Inventory150$20.00$ 3,000 March 8 Batch3, ,900 March 18 Batch3, ,800 March 20 Sales5,200 March 28 Batch3, ,700 March 31 Sales3,600 Total Cost of Goods Available for Sale$188,400 Exhibit 6 Unit Costs and Sales for Favorite Cookie Company for March Return to the slide show