13-1
Chapter F13
Operating
Activities
Electronic Presentation
by Douglas Cloud
Pepperdine University
13-2
Objectives
1. Identify the purpose and major components
Once you have
of the income statement.
completed this chapter,
2. Explain and apply rules for measuring
you should be able to:
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.
Continued
13-3
Objectives
4. 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.
5. Identify routine and nonroutine events that
affect a company’s income statement.
13-4
Objective
1
Identify the purpose and
major components of an
income statement.
13-5
Basic Operating Activities
The income statement reports the
results of operating activities for a
fiscal period on an accrual basis.
Exhibit 1
Income Statement for
Mom’s Cookie Company
13-6
2004
For the Year Ended December 31, 2005
Net sales revenue
$3,235,600
$686,400
Cost of goods sold
(1,954,300)
(457,600)
Gross profit
1,281,300
228,800
Selling, general and
administrative expenses
(1,094,700)
(148,300)
The first item on the186,600
income
Operating income
80,500
Interest expense
(20,400)
(4,800)
statement is net sales revenue.
Pretax income
166,200
75,700
Income taxes
(49,860)
(22,710)
Net income
$ 116,340
$ 52,990
Earnings per share
$ 0.29
$
0.13
Exhibit 1
Income Statement for
Mom’s Cookie Company
For the Year Ended December 31, 2005
Net sales revenue
$3,235,600
Cost of goods sold
(1,954,300)
Gross profit
1,281,300
Selling, general and
administrative expenses
(1,094,700)
Cost of goods sold is subtracted
Operating income
186,600
Interest expensefrom net sales revenue
(20,400)
to
Pretax income compute gross profit.
166,200
Income taxes
(49,860)
Net income
$ 116,340
Earnings per share
$ 0.29
13-7
2004
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$
0.13
Exhibit 1
Income Statement for
Mom’s Cookie Company
13-8
2004
For the Year Ended December 31, 2005
Net sales revenue
$3,235,600
$686,400
Cost of goods sold
(1,954,300)
(457,600)
Gross profit
1,281,300
228,800
Selling, general and
administrative expenses
(1,094,700)
(148,300)
Operating income
186,600
80,500
Interest expense
(20,400)
(4,800)
Pretax
166,200
75,700
Theincome
expenses for marketing and
distributing
a
Income
taxes products and managing
(49,860)
(22,710)
company’s
its operations
Net income
116,340
$ 52,990
are subtracted from gross$profit
to calculate
Earnings per share operating income.
$ 0.29
$
0.13
Exhibit 1
Income Statement for
Mom’s Cookie Company
13-9
2004
For the Year Ended December 31, 2005
Non-operating
expenses $3,235,600
or losses, such
as
Net sales
revenue
$686,400
Cost of goods
sold
(1,954,300)from
(457,600)
Interest
Expense, are subtracted
Gross
profit income to compute
1,281,300
228,800
operating
pretax income.
Selling, general and
administrative expenses
(1,094,700)
(148,300)
Operating income
186,600
80,500
Interest expense
(20,400)
(4,800)
Pretax income
166,200
75,700
Income taxes
(49,860)
(22,710)
Non-operating income
gains are$ 52,990
Net income
$ or
116,340
added,
Earnings per
shareto compute pretax
$ income.
0.29
$
0.13
Exhibit 1
Income Statement for
Mom’s Cookie Company
For the Year Ended December 31, 2005
Net sales revenue
$3,235,600
Cost of goods sold
(1,954,300)
Income tax expense
is
Gross profit
1,281,300
Selling, general
and
subtracted
from pretax income
administrative to
expenses
calculate net (1,094,700)
income.
Operating income
186,600
Interest expense
(20,400)
Pretax income
166,200
Income taxes
(49,860)
Net income
$ 116,340
Earnings per share
$ 0.29
13-10
2004
$686,400
(457,600)
228,800
(148,300)
80,500
(4,800)
75,700
(22,710)
$ 52,990
$
0.13
Exhibit 1
Income Statement for
Mom’s Cookie Company
13-11
2004
For the Year Ended December 31, 2005
Net sales revenue
$3,235,600
$686,400
Cost of goods sold
(1,954,300)
(457,600)
Gross profit
1,281,300
228,800
Selling, general and
administrative expenses
(1,094,700)
(148,300)
Operating income
186,600
80,500
Interest expense
(20,400)
(4,800)
Earnings per share is reported
on a 75,700
Pretax income
166,200
Income taxescorporate income statement.
(49,860)
(22,710)
Net income
$ 116,340
$ 52,990
Earnings per share
$ 0.29
$
0.13
13-12
Objective
2
Explain and apply rules
for measuring revenues
and receivables and
reporting revenue
transactions.
13-13
Exhibit 2
Activity
Sales of
Goods and
Services to
Customers
The Effect of Sales and
Services on the Financial
Statements
Income
Statement
Balance
Sheet
Cash
Operating
Revenues
Accounts
Receivable
Statement of
Cash Flows
Cash
Received
from
Customers
13-14
Revenues and Receivables
1. The selling
company
has completed
most of the
Revenue
should
be
activities necessary to produce and sell the goods
recognized when four
or services.
criteria have been
2. The selling company has incurred the costs
met.
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.
13-15
Recognizing Revenue for
Long-Term Contracts
Constructo, Inc.
contracts to
For the fiscal period
construct a new
ending in 2004,
The project
will
building
fortake
$20three
Constructo, Inc. will
years. Constructo,
million. Inc.
recognize revenue of $4
estimates at the end of
million (20% of $20
2004, the first year of the
million).
contract, 20 percent of the
work has been completed.
13-16
Sales Discounts and Returns
Revenues are reported
on the income
statement
net of is a reduction in the
A discount
discounts and
expected
normal sales price to encourage
returns.
customers to buy large quantities
of goods (a quantity discount) or
to pay their accounts early (a
sales discount).
13-17
Sales Discounts and Returns
Mom’s Cookie Company sells goods priced at
$5,000 to a customer on November 4, 2004,
and offers a 2% discount if the customer pays
in full within 10 days of the purchase.
ASSETS
Date
Accounts
11/4 Accounts Rec.
Sales Revenue
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
5,000
5,000
13-18
Sales Discounts and Returns
If the customer pays within the discount
period, the company reduces the revenue by
$100 ($5,000 x 2%) and records the discount.
ASSETS
Date
Accounts
11/4 Cash
Sales Discount
Accounts Rec.
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
4,900
–100
–5,000
13-19
Sales Discounts and Returns
Returns
Like sales discounts,
sales returns are
subtracted from sales
revenues in reporting
net operating
revenues on the
income statement.
13-20
Sales Discounts and Returns
Textbook
From past
Publishing
experience,
Company
the company
sells $5
million
estimates
of that
books
$500,000
during fiscal
of its 2004
year 2004.
sales
will be returned in 2005.
ASSETS
Date
Accounts
12/31 Sales Returns
Allowance for
Returns
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
–500,000
–500,000
13-21
Sales Discounts and Returns
A major principle of
accounting is the
matching principle.
MATCHING
13-22
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.
13-23
Sales Discounts and Returns
Textbook Publishing received a return of $100,000
(sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
ASSETS
Continued
Date
Accounts
1/12 Allowance for
Returns
Accounts Rec.
Cash
= LIABILITIES
Other
Assets
100,000
–100,000
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
13-24
Sales Discounts and Returns
Textbook Publishing received a return of $100,000
(sales price) on January 12, 2005, from a credit
customer. The goods cost the company $75,000.
ASSETS
Date
Accounts
1/12 Merchandise
Inventory
Cost of Goods
Sold
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
75,000
75,000
13-25
Uncollectible Accounts
Mom’s Cookie Company has a balance in
Allowance for Doubtful Accounts of $1,000
at the end of its 2004 fiscal year before
adjustments are made for the year.
Management evaluates the company’s credit
sales and outstanding receivables and
determines that the amount of the
allowance account should be $5,000.
13-26
Uncollectible Accounts
Since the current allowance balance
is $1,000, the allowance account
Doubtful
needs to be increased by $4,000.
Accounts
Expense is a
selling expense
Date
Accounts
12/31 Doubtful
Accounts Exp.
Allowance for
Doubtful Accts.
ASSETS
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
–4,000
–4,000
13-27
Uncollectible Accounts
On February 12, 2005, Mom’s Cookie
Company determines that $800 owed by
Home Goods Company cannot be collected.
ASSETS
Date
Accounts
2/12 Accounts
Receivable
Allowance for
Doubtful Accts.
Cash
= LIABILITIES
Other
Assets
–800
800
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
13-28
Warranty Costs
Products under
warranty allow the
customer to return a
defective product for
replacement or refund.
13-29
Warranty Costs
From sales in March, 2004, Harris Company
estimates warranty costs of $12,000 will be
incurred in April, May, and June.
ASSETS
Date
Accounts
3/31 Warranty
Expense
Warranty
Obligations
Cash
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
–12,000
12,000
13-30
Warranty Costs
On May 15, Harris replaces a faulty motor on an
appliance. The cost of the motor is $300 and the
cost of labor to install the motor is $100.
ASSETS
Date
Accounts
5/15 Warranty
Obligations
Parts Inventory
Wages Payable
Cash
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
–400
–300
100
13-31
Objective
3
Describe reporting rules for
inventories and cost of
goods sold and compare
reporting of inventories for
merchandising and
manufacturing companies.
Exhibit 3
The Effect of Inventory
Transactions on the
Financial Statements
13-32
13-33
Reporting Inventories and
Cost of Goods Sold
On May 4, 2004, Mom’s Cookie Company
purchased $10,000 of inventory on credit.
ASSETS
Date
Accounts
5/4 Merchandise
Inventory
Accounts
Payable
Cash
= LIABILITIES
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
Other
Assets
10,000
10,000
13-34
Reporting Inventories and
Cost of Goods Sold
On May 6, Mom’s Cookie Company
sold $4,000 of that inventory.
ASSETS
Date
Accounts
5/6 Cost of Goods
Sold
Merchandise
Inventory
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
–4,000
–4,000
13-35
Reporting Inventories and
Cost of Goods Sold
On May 12, Mom’s Cookie Company
pays for half of the inventory purchase.
ASSETS
Date
Accounts
5/12 Accounts
Payable
Cash
Cash
= LIABILITIES
Contributed Retained
Capital
Earnings
Other
Assets
–5,000
–5,000
+ OWNERS’ EQUITY
13-36
Reporting Inventories and
Cost of Goods Sold
Purchase discounts for paying for
goods and services within the
discount period should result in both
Inventory and Accounts Payable
being reduced.
13-37
Exhibit 4
Components of
Manufacturing Inventory
Inventories
Raw
Materials
Work-inProcess
Labor and
Overhead
Costs
Finished
Goods
13-38
Reporting Inventories and
Cost of Goods Sold
Manufacturing
Raw materials
inventory includes the
costs of component
parts or ingredients that
become part of the
product being
manufactured.
13-39
Reporting Inventories and
Cost of Goods Sold
Manufacturing
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.
13-40
Reporting Inventories and
Cost of Goods Sold
Manufacturing
Finished goods
inventory includes the
costs of products that
have been completed in
the manufacturing
process and are
available for sale to
customers.
13-41
Exhibit 5
Computation of Manufacturing
Inventory Costs
13-42
Objective
4
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.
13-43
Measuring Inventory
Hydro Company sells and
services agricultural
irrigation equipment. On
March 20, 2004, Hydro
purchased 20 pump motors
at $200 each. Hydro
already had 8 identical
motors on hand, for which
it had paid $175.
13-44
Measuring Inventory
On March 22, 2004, a
customer purchased one
motor. Should the company
record the cost of goods
sold for the motor as $175
or as $200?
13-45
Measuring Inventory
First-In, First-Out Method
Mar. 1
78 units @ $175 per unit
Mar. 20
20 units @ $200 per unit
Sold 1
Using the first-in, first-out method, the
cost of the motor sold would be recorded
as $175 because $175 is the cost of the
oldest item in Hydro’s inventory.
13-46
Measuring Inventory
Last-In, First-Out Method
Mar. 1
8 units @ $175 per unit
Mar. 20
20 units @ $200 per unit
19
Sold 1
Using last-in, first-out, 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.
13-47
Measuring Inventory
Weighted-Average Method
Mar. 1
8 units @ $175 per unit = $1,400
Mar. 20
20 units @ $200 per unit = 4,000
28 units $192.86 per unit $5,400
Using the weighted-average method,
$5,400
÷ 28the
units
Hydro would
record
cost of the
motor sold on March 22 as $192.86.
13-48
Measuring Inventory
Mom’s Cookie Company has finished
goods inventory of $3,000 at the end of
February 2005. The inventory includes 150
cases of cookies at a cost of $20 per case.
Exhibit 6 (Slide 49) summarizes unit costs
and sales for the company for March.
13-49
Exhibit 6
Unit Costs and Sales
for Mom’s Cookie
Company for March
March 1 Inventory
March 8 Batch
March 18 Batch
March 20 Sales
March 28 Batch
March 31 Sales
Total Cost of Goods
Available for Sale
150
3,000
3,000
5,200
3,000
3,600
$20.00
20.30
20.60
$ 3,000
60,900
61,800
20.90
62,700
$188,400
13-50
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
150 units @ $20.00 per unit
Mar. 8
Mar. 18
3,000 units @ $20.30 per unit
3,000 units @ $20.60 per unit
Inventory purchased on
March 8 and March 18
13-51
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
1500 units @ $20.00 per unit
3,000 units @ $20.30 per unit
3,000 units @ $20.60 per unit
Sold 5,200 units on March 20
Sold all
13-52
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
1500 units @ $20.00 per unit
3,0000 units @ $20.30 per unit
3,000 units @ $20.60 per unit
Sold 5,200 units on March 20
Sold all
13-53
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
3,000
950 units @ $20.60 per unit
Sold 5,200 units on March 20
Sold 2,050
13-54
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
950 units @ $20.60 per unit
= $
0
=
0
= 19,570
Ending inventory = $19,570
13-55
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
950 units @ $20.60 per unit
3,000 units @ $20.90 per unit
Purchased 3,000 units at $20.90
per unit on March 28
13-56
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
9500 units @ $20.60 per unit
3,000 units @ $20.90 per unit
Sold 3,600 units on March 31
Sold 950
13-57
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
9500 units @ $20.60 per unit
350 units @ $20.90 per unit
3,000
Sold 3,600 units on March 31
Sold 2,650
13-58
Measuring Inventory
First-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
1500 units @ $20.00 per unit
0 units @ $20.30 per unit
9500 units @ $20.60 per unit
350 units @ $20.90 per unit
=
=
=
=
Ending inventory =
$
0
0
0
7,315
$7,315
13-59
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
150 units @ $20.00 per unit
3,000 units @ $20.30 per unit
3,0000 units @ $20.60 per unit
Sold 5,200 units on March 20
Sold all
13-60
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
150 units @ $20.00 per unit
3,000
800 units @ $20.30 per unit
0 units @ $20.60 per unit
Sold 5,200 units on March 20
Sold 2,200
13-61
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
150 units @ $20.00 per unit
3,000
800 units @ $20.30 per unit
0 units @ $20.60 per unit
=
=
=
$ 3,000
16,240
0
Ending inventory = $19,240
13-62
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
150 units @ $20.00 per unit
3,000
800 units @ $20.30 per unit
0 units @ $20.60 per unit
3,000 units @ $20.90 per unit
Purchased 3,000 units on March 28
13-63
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
150 units @ $20.00 per unit
800 units @ $20.30 per unit
0 units @ $20.60 per unit
3,0000 units @ $20.90 per unit
Sold 3,600 units on March 31
Sold all
13-64
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
150 units @ $20.00 per unit
3,000
800 units @ $20.30 per unit
200
0 units @ $20.60 per unit
0 units @ $20.90 per unit
Sold 3,600 units on March 31
Sold 600
13-65
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
Mar. 28
150 units @ $20.00 per unit
3,000
200 units @ $20.30 per unit
=
=
=
=
$3,000
4,060
0
0
Ending inventory =
$7,060
0 units @ $20.60 per unit
0 units @ $20.90 per unit
13-66
Measuring Inventory
Average Inventory Method
Perpetual Inventory System
Beg. Inv.
Mar. 8
Mar. 18
150 units @ $20.00 per unit
3,000 units @ $20.30 per unit
3,000 units @ $20.60 per unit
Mar. 20 Average cost $20.439
$125,700 ÷ 6,150 units
=$
3,000
=
60,900
=
61,800
$125,700
13-67
Measuring Inventory
Average Inventory Method
Perpetual Inventory System
Mar. 20
6,150
perunit
unit
150 units @ $20.439
$20.00 per
3,000 units
units @
@ $20.30
$20.439per
perunit
unit
Mar. 20 –5,200
Mar. 20
950 units @ $20.439 per unit
Sold 5,200 units on March 20
= $125,700
=
106,283
$ 19,417
13-68
Measuring Inventory
Average Inventory Method
Perpetual Inventory System
Mar. 20
Mar. 28
950
perunit
unit
150 units @ $20.439
$20.00 per
3,000 units @ $20.90 per unit
Mar. 28
3,950 units @ $20.789 per unit
=
$19,417
=
62,700
Purchased
3,000 units
on March
$82,117
÷ 3,950
units 28
at $20.90 per unit
$ 82,117
13-69
Measuring Inventory
Last-In, First-Out Method
Perpetual Inventory System
Mar. 20 3,950
perunit
unit
150 units @ $20.789
$20.00 per
Mar. 31 –3,600 units @ $20.789 per unit
Mar. 31
350 units @ $20.789 per unit
Sold 3,600 units on March 31
=
$82,117
=
74,841
$ 7,276
13-70
Measuring Inventory
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 next to me to review how this amount
was determined.
13-71
Measuring Inventory
Regardless of the inventory method
used, the cost of goods available for
sale is the same amount .
13-72
Measuring Inventory
Now, let’s determine the cost of goods
sold when using the lifo perpetual
inventory method.
Cost of goods
available for sale
– Ending inventory
Cost of goods sold
$188,400
7,060
$181,340
13-73
Measuring Inventory
How about fifo perpetual?
Cost of goods
available for sale
– Ending inventory
Cost of goods sold
$188,400
7,315
$181,085
13-74
Inventory Estimation
and Income Taxes
The primary reason for the use of
LIFO is the tax advantage that LIFO
provides to many companies.
13-75
Exhibit 12
Income Statement for Mom’s
Cookie Company Using FIFO
and LIFO Inventory Estimation
For the Year Ended December 31, 2005 FIFO
Sales revenues
Cost of goods sold
Gross profit
Selling, general, and admin. exp.
Operating income
Interest expense
Pretax income
Income tax
Net income
$3,235,600
(1,946,800)
1,288,800
(1,094,700)
194,100
(20,400)
173,700
(52,110)
$ 121,590
LIFO
$3,235,600
(1,954,300)
1,281,300
(1,094,700)
186,600
(20,400)
166,200
(49,860)
$ 116,340
13-76
Lower of Cost or Market
GAAP require companies
If current market cost is
to compare the cost
below the cost resulting
determined through
from the use of an
inventory estimation
estimation method such
methods with the current
as FIFO or LIFO, the
market cost of the
inventory must be written
inventory on hand at the
down to the current
end of the fiscal year.
market costs.
13-77
Lower of Cost or Market
GAAP require companies
If current market
cost is
This
requirement
is
known
to compare the cost
below
the
cost
resulting
as
the
lower
of
cost
or
determined through
from
the use
of an
market
inventory
rule.
inventory estimation
estimation method such
methods with the current
as FIFO or LIFO, the
market cost of the
inventory must be written
inventory on hand at the
down to the current
end of the fiscal year.
market costs.
13-78
Lower of Cost or Market
Tucker Company acquired $500,000 of
merchandise on August 18, 2004. By
December 31, 2004, the end of its fiscal
year, it had sold $300,000 of the
merchandise. Tucker estimates that the
market value of the remaining inventory
is $140,000 on December 31, 2004.
13-79
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.
ASSETS
Date
Accounts
12/31 Loss on
Inventory
Merchandise
Inventory
Cash
= LIABILITIES
Other
Assets
+ OWNERS’ EQUITY
Contributed Retained
Capital
Earnings
–60,000
–60,000
13-80
Objective
5
Identify routine and
nonroutine events that
affect a company’s
income statement.
13-81
Operating Expenses
Most operating expenses
other than cost of goods
sold are period costs.
13-82
Operating Expenses
Yes, period costs are
expensed in the fiscal period
in which they occur.
13-83
Exhibit 13
Activity
Use of
Resources in
Operating
Activities
The Effect of Period Costs on
the Financial Statements
Income
Statement
Operating
Expenses
Balance
Sheet
Assets
Current Assets
Liabilities
Statement of
Cash Flows
Cash Paid
Current
Liabilities
13-84
Non-recurring Gains and Losses
Discontinued operations,
extraordinary items, and accounting
changes may appear on a company’s
income statement.
13-85
Non-recurring Gains and Losses
Discontinued operations are product
lines or major parts of a company from
which the company will no longer
derive income …
13-86
Non-recurring Gains and Losses
…because it has sold or closed the
facilities that produced the product
line or that included that part of the
company.
13-87
Non-recurring Gains and Losses
Extraordinary items are
gains or losses that are both
unusual and infrequent for a
particular company.
13-88
Non-recurring Gains and Losses
A cumulative effect of a change in accounting
method is a gain or loss associated with changing
accounting methods or adopting new accounting
standards.
13-89
CHAPTER F13
THE END
13-90
13-91
Exhibit 6
Unit Costs and Sales
for Mom’s Cookie
Company for March
March 1 Inventory
March 8 Batch
March 18 Batch
March 20 Sales
March 28 Batch
March 31 Sales
Total Cost of Goods
Available for Sale
150
3,000
3,000
5,200
3,000
3,600
Return to Slide 70
$20.00
20.30
20.60
$ 3,000
60,900
61,800
20.90
62,700
$188,400