COGS and Inventory Accounting Flashcards
Sales Revenue + Cost of Goods Sold =
Gross Profit (margin) - Operating expenses = Net income
Perpetual Inventory gives…
continuous information on the dollar amount of inventory and cost of goods sold
- account for change in real time with each sale
True Perpetual inventory system has what accounts?
Inventory (Credit)
Cost of Goods Sold (debit)
Period inventory system…
Physical inventory will be run at the end of the accounting period and a period end adjusting entry will be used to compute the cost of goods available for sales
Periodic COGS =
beginning inventory + (Net purchases + freight) - ending inventory
Define shrinkage
The difference between the physical inventory and the inventory account maintained by the computer
- Perpetual system only
How do you handle shrinkage in accounts?
Difference is debited to COGS and credited to inventory (you just lost the money)
Store manager determines there is $425 dollars of shrinkage, how do you show this in accounts?
COGS
Debit | Credit
425 |
Inventory
Debit | Credit
| 425
In periodic inventory the end of period inventory is used…
To calculate COGS and ending inventory is recorded as an asset on the balance sheet (all goods that are for resale)
Define Perpetual System
Maintain accurate day-to-day value of the business’ inventory and requires individual accounts for every stock keeping unit
- Every time something is purchased or sold, the account has to be updated
Define Periodic System
No adjustments are made to inventory until close of accounting period
Take and End of period inventory (EI) and this becomes BI for the next period
COGS =
(BI + Purchases + Freight) - EI
Pharmacies have what kind of system?
Periodic but moving towards perpetual with the use of Point of Sales systems
Where is most purchasing done?
Wholesalers
What determines the cost?
Acquisition cost + wholesaler fee
What determines the wholesaler fee?
Buying groups negotiation
Monthly volume of purchases
How well you negotiate down the cost
Special payment terms?
Most of the time if you pay in a certain time you will get a discount or if you prepay you will get the largest discount
How do wholesalers make money?
They make their money off of rebates from the manufacturers
- If they meet a certain amount of sales they get so much back
Charge backs
Define Charge backs
Large buying group negotiates a price that is less than what the manufacturer charges the wholesaler and the wholesaler then charges back the difference to the manufactures
Perpetual System: Joe purchases $35 of prescriptions with cash (only cost the owner $25 Show T charts.
Cash
Debit | Credit
35
Sales
Debit | Credit
35
COGS
Debit | Credit
25
Inventory
Debit | Credit
25
John Day returns $200 of incorrectly picked drug purchased on credit. Show T charts for periodic
Account Payable
Debit | Credit
200
Purchase Return
Debit | Credit
200
John Day returns $200 of incorrectly picked drug purchased on credit. Show T charts for perpetual
Account Payable
Debit | Credit
200
Inventory
Debit | Credit
200
Harry Johnson pays a bill $100 previously purchased on credit with terms of 2/10;N30 within 6 days of his date. Show T charts for periodic
Accounts Payable
Debit | Credit
100
Cash
Debit | Credit
98
Purchase Discount
Debit | Credit
2
Harry Johnson pays a bill $100 previously purchased on credit with terms of 2/10;N30 within 6 days of his date. Show T charts for perpetual
Accounts Payable
Debit | Credit
100
Cash
Debit | Credit
98
Inventory
Debit | Credit
2
Grandma Moses returns a $50 vaporizer that she had bought on credit. The Acquisition cost of the vaporizer is $30. Show T charts for periodic
Sales Return
Debit | Credit
50
Accounts Receivable
Debit | Credit
50
Grandma Moses returns a $50 vaporizer that she had bought on credit. The Acquisition cost of the vaporizer is $30. Show T charts for perpetual
Sales
Debit | Credit
50
Accounts Receivable
Debit | Credit
50
Inventory
Debit | Credit
30
COGS
Debit | Credit
30
COGS Periodic requires
Out-dated merchandise be removed (not inventory)
Wasted controlled substances removed (not inventory)
Use tags to prevent double counting
All items must have a cost assigned (last invoice)
Define Specific Invoice Prices
Sticker each bottle as it comes into the store so you know the cost of that bottle or use SKU
Define SKU
Stock Keeping Unit
Record the number of remaining tablets, capsules and their individual prices and total
Define Weighted Average method
Yields a cost that is representative of the cost of the product over the entire accounting period
(total cost/total units = weighted average method)
Define FIFO
First In: First Out
First drugs in will be sold before the new drugs that come in after those
Cost of the last items purchased are assigned to ending inventory
Define LIFO
Last in; first out
Last goods received are matched with the revenues generate for that period
When your ending inventory is the lowest,…?
You have the highest COGS which shows less gross profit which means you pay less taxes (woot!)
AKA: LIFO
Gross Margin =
Sales-COGS
If gross profit increases =
you pay more taxes
