ACCOUNTING 101

CHAPTER 4
• MERCHANDISE INVENTORY AND COST OF SALES

Under merchandising concern, the business is engaged in buying and selling

of goods or commodities. In the process, not all goods that are purchased can
be sold. The goods that are left unsold at the end of the period are called
merchandise inventory.
 ❤️❤️❤️❤️
Beginning inventory ❤️❤️❤️❤️ at 1,000 = 8,000

+
Purchases ❤️❤️❤️ at 1,000 = 6,000
❤️❤️❤️
=

Available for sale ❤️❤️❤️❤️❤️❤️ at 1,000 = 14,000

❤️
- ❤️❤️❤️❤️❤️❤️
❤️
Cost of sales Or cost of good at 1,000 = 4,000

Sales ❤️❤️❤️❤️
=
Ending inventory ❤️❤️❤️❤️❤️ at 1,000 = 10,000
❤️❤️❤️❤️❤️
To simplify the illustration
Quality Cost Amount

Beg. Inventory 8 at P1,000 = P8,000

+ Purchases 6 at P1,000 = P6,000
= Available for sale 14 at P1,000 = P14,000

-Cost of sales 4 at P1,000 = P4,000

Ending inventory 10 at P10,000= P10,000

Based on the above illustration, the ending inventory is computed as belows;

10 units as P1,000 = P10,000

The 10,000 ending of let’s say Dec. 31, 2OA will eventually
become the beginning inventory of January 1, 2018.

Let us assume further that during 2OB, The business had made the
total purchases of 80,000 and had incurred Freight-in of P2,500. It
had also recorded Purchase Returns and Allowance and Purchase
Discounts of P4,000 and P3,000 respectively. At the end of 2OB,
the cost of merchandise left on hand is P30,000 (with aster risk).
COST OF SALES
Base on the given data,the cost of sales or cost of goods sold is computed as follows:

Cost of Goods Sold

Merchandise inventory, Beg P10,000

Purchases P 80,00
Add: Freight-in 2,500
Gross Purchase P 82,500
Less: Purchase Returns and Allowances P 4,000
Purchase Discount 3,000 7,000
Net Purchases P 75,500
Goods available for sale P 85,500
Less: Merchandise inventory, End P 30,000

Costo ofsales or cost of goods sold P 55,500

• TO ILLUSTRATE

• During the period of 20B, the business has generated sales amount to
P100,000. The Sales Rethrns & Allowances and Sales Discounted were P2,000
& P3,000 respectively.

Sales P100,000
Less: Sales returns and allowance P 2,000
Sales discounts 3,000 5,000

Net Sales P 9,500

The excess of Sales or Net Sakes over the lost of Sales of Cost of Goods Sold is
calles"GROSS PROFIT". combining together the given amount of Net Sales &
corresponding Cost of Sales,equals Gross Profir of 20B computed as follows.
NET SALES

Sales P 100,000

Less: Sales returns and allowance P 2,000

Sales discounts 3,000 5,000

Net Sales P 95,000

Cost of Gold Solds

Merchandise inventory, bag P 10,000

Purchase P 80,000

Add: Freight in 2,500

Gross Purchases P 82,000

Less: Purchase Ret & allow P 4,000

Purchase discount P 3,000 7,000

Net Purchase P 75,500

Cost of goods avaIlable for sale P 85,500

Less: Merchandise inventory, End 30,000

Cost of goods sold 55,500

Gross Profit P 39, 5 00

 OPERATING EXPENSES

• Under merchandising concern, operating expenses are classified into two:

Selling or Distribution Expenses and General and Administrative Expenses.
PROFIT or LOSS

When total expenses are deducted from Gross profit, the result will either be
profit or loss depending, upon the following situations.a. If the amount of
expenses incurred during the period is smaller than gross profit, the result is
profit.b. If the amount of expenses is bigger than the gross profit, the result is a
loss.
DETERMINATION OF OWNERSHIP OF MERCHANDISE

The determination of who has the ownership over the merchandise is important.
Does the ownership of merchandise remain to the seller or has already been
transferred to buyer? It can be resolved through to the following shipping terms:
F.O.B means "Free on Board“
a. F.O.B Sipping Point - The buyer shoulders the shipping expenses from the
"shipping point" or "point of origin" to his place of business. This signifies that upon
LOADING of the merchandise to the common carrier, the ownership of the
merchandise belongs to the buyer already regardless of the invoice date of the
seller.
b. F.O.B destination - The seller shoulders the shipping expenses from his place of
business to the "point of destination". This signifies that the "ownership" of the
merchandise passes from the seller to the buyer upon UNLOADING the
merchandise from the common carrier.
 WHO SHOULDERS THE FREIGHT ?
Thw following will determine who should shoulder the freight. Would it be the
resellers of the buyer ?
• F.O.B Shipping point- it is the buyer who shoulder the freight.
a.) Foreign Prepaid- usually the seller (shipper) pays in advance the foreign in
behalf of the buyer. The respective journal entries in the book of the seller and
their buyer follows.
b.) Freight Collect- Usually the seller (shipper) instruct the carrier in charges the
payment of freight will be upon arrival at buyer’s place.
• F.O.B Destination- it is the seller who shoulders the freight.
a.) Freight Prepaid- the seller pays it own freight of shipment.
b.) Freight Collect- Usually the seller (shipper) instruct the carrier in charge that
payment of freight in charge that payment of freight will be upon arrival at the
buyer place.
EXERCISES/PROBLEMS
………