Fundamentals of Accountancy Business

Learning Area Grade Level 11

W8 Quarter
and Management 1
Fourth Date

I. LESSON TITLE Preparation of Statement of Cost of Goods Sold and Gross Profit
II. MOST ESSENTIAL LEARNING Prepare a statement of Cost of Goods Sold and Gross Profit (ABM_FABM11- IVe-j -4)
COMPETENCIES (MELCs)

III. CONTENT/CORE CONTENT Accounting Cycle of a Merchandising Business

IV. LEARNING PHASES AND ACTIVITIES
I. Introduction (Time Frame: 10 minutes)
By the end of our topic, you should be able to:
1. demonstrate the proper way to prepare statement of cost of goods sold,
2. calculate a company’s cost of goods sold and gross profit, and
3. create a statement of cost of goods sold.

Good day! Let us review the operating cycle of a merchandising business. Merchandise accounting caters both the buyer and seller’s point of
view.
Operating Cycle of a Merchandising Business Operating Cycle of a Merchandising Business with
Cash Sales with Credit/Account on Sales

Cash

Collection of Cash from

Purchase of
Accounts Receivable
Inventories

Credit Sales - Recording of

Figure 1 Figure 2
The cycle of a merchandising entity uses cash to purchase inventory though sometimes merchandisers with a good credit standing have the
privilege of acquiring inventories by paying it for a longer time. Cash collected from the sales of merchandise will be used to purchase more
merchandise to sell, and the cycle continues. Figures 1 and 2 show the operational flow of a merchandising type of business.

All transactions recorded come from source documents. To recall, merchandising uses several source documents such as sales invoice, bill of
lading, statement of account, official receipt, deposits slips, check, purchase requisition, purchase order, receiving report, and credit
memorandum.

Accounts used in recording must reflect the correct balances in the financial statements. Certain accounts are periodically adjusted to reflect their
correct value. Recall the lessons in Weeks 6 and 7 were posting to ledgers and preparation of trial balance were discussed. You were taught how
to post to ledgers and compute their ending balances by subtracting debit and credit totals. Ending balances are then forwarded to the next
accounting cycle which is the preparation of trial balance. Some accounts in the trial balance need to reflect the correct balances before the
issuance of the financial statement; this requires journal entries. Journal entries to be done before the issuance of financial statements are called
an Adjusting entry. Failure to make adjusting entries may overstate and understate income and expense and may lead to an erroneous presentation
of the financial statement.

A service and merchandise type of business follows rules in recording and recognizing income and expenses. The only difference is the existence
of a merchandise inventory account or the existence of a tangible product that a customer may buy. Statement of Comprehensive Income (SCI) is
the first financial statement to prepare. It is to determine the result of the operation to affect its result to the owner’s equity account.
Let us compare the SCI of a servicing business and a
merchandising business. Both types of business recognized
income and expense except the existence of cost of goods sold
and gross profit.

D. Development (Time Frame: 120 minutes)

The Cost of Goods Sold (COGS)are the cost of all the items sold at a particular point in time and Gross Profit (GP) is the amount left after
deducting COGS from Net Sales. Familiarization with the step-by-step process in journal entries and amounts posted in ledgers is necessary to
create a reliable financial statement. You are already equipped on how to prepare SCI for a servicing business. In this lesson, we will deal more
with how to compute the Cost of Goods Sold.

Inventory Accounting System

The operation of a merchandising type of business revolves around the movement of its inventory. There are two types of inventory accounting
systems: the Periodic Inventory System and the Perpetual Inventory System. The policy of the company determines which system to use. Below
are the comparative entries for Periodic and Perpetual Systems.

Let us assume the following inventory transactions and how it will be journalized using the two inventory systems.
Transactions Periodic Inventory System Perpetual Inventory System
Beginning Inventory: 200 units @
₱40 per unit
Debit Credit Debit Credit
Purchases on Purchases 40,000 Merchandise Inventory 40,000
account: 1,000 units at Accounts Payable 40,000 Accounts Payable 40,000
₱40
Freight on purchase, Freight-in 500 Merchandise Inventory 500
₱500 Cash 500 Cash 500

Purchase returns, Accounts Payable 800 Accounts Payable 800

₱800 (20 units @ ₱40) Purchase returns 800 Merchandise Inventory 800

Accounts receivable 64,000 Accounts receivable 64,000

Sales 64,000 Sales 64,000
Cost of goods sold 32,000
Sold on account
(800 units @ ₱40)
₱64,000 (800 units Merchandise inventory 32,000
@ ₱80)
Sales returns ₱800 (10 Sales returns 800 Sales returns Accounts 800
units @ ₱80) Accounts receivable 800 receivable Merchandise 800
inventory (10 units 400
@₱40)
Cost of goods sold 400

NOTE:
● All inventory items are debited to purchases
account
● Physical count will be taken and assigned its
value. This must be done to determine the cost of goods
sold as shown below:
● All transactions are automatically
recorded
● No need for a physical count in order to
compute the cost of goods sold, but physical
count may be done to ensure accuracy of the
system.
● General ledger amounts determine the
cost of goods sold.
 DETERMINING COST OF GOODS SOLD

Cost of Goods Sold: General Ledger for Cost

INVENTORY COUNT PER Merchandise Inventory, Beginning 8,000 of Goods sold
UNIT Add: Purchases 40,000
Less: Purchase returns and allowances Debit
800 Credit
Beginning Inv - 200 Purchase discounts 0 800
Purchases 1,000 Sales 32,000
Net Purchases
Purchase returns ( 20) Total 39,200 Sales returns
Add: Freight in 400
GAS 1,180 500
Sales (800-10) 790 Cost of goods purchased 39,700
Cost of goods available for sale 31,600
Ending Unit 390
Merchandise Inventory end (390 47,700
units x ₱40) Add: Freight in 500
15,600
COST OF GOODS SOLD
32,100 COST OF GOODS SOLD 32, 100

The illustration above shows how the two-inventory systems work. At the end, the different systems will derive the same amount for Cost of
Goods sold.
The illustration below shows how to compute the gross
profit.

Sales ₱ 64,000
Less: Sales returns 800
Net Sales ₱ 63,200
Less: Cost of goods sold 32,100
Gross profit ₱ 31,100

Gross Profit is part of the Statement of Comprehensive

Income to cover other expenses as shown in the illustration.

E. Engagement (Time Frame: 90 minutes)

Learning Task No.1
Directions: Given below are account balances of Eva Merchandising. You are tasked to prepare the cost of goods sold using periodic and
perpetual inventory systems and to compute for gross profit. Write your answers in your journal.
1. Merchandise inventory, beginning - ₱250,000
2. Purchases on account - 380,000
3. Sales on account - 650,000
4. Sales returns - 20,000
5. Ending inventory per count - 43,500

A. Assimilation (Time Frame: 30 minutes)

Learning Task No.2
Directions: Answer the following questions.
1. What is the difference between the Comprehensive Income Statement of a servicing business to a merchandising business?
2. What is the main difference between periodic and perpetual inventory systems?
3. Can a business enterprise have the freedom to choose which accounting inventory systems to use? Explain.

V. ASSESSMENT (Time Frame: 30 minutes)

(Learning Activity Sheets for Enrichment, Remediation, or Assessment to be given on Weeks 3 and 6)
Learning Task No.3
Directions: Write TRUE if the statement is correct or FALSE if is incorrect.
1. The main difference between a merchandising business from a servicing business is the computation of net income.
2. The gross profit from sales is equal to sales minus operating income.
3. Sales return will increase the total net sales for the period.
4. Freight expenses are an additional cost to the seller.
5. Freight-in expenses is an operating expense.
REFLECTION (Time Frame: 10 minutes)
Communicate your personal assessment as indicated in the Learner’s Assessment Card.
Personal Assessment on Learner’s Level of Performance
Using the symbols below, choose one which best describes your experience in working on each given task. Draw it in the column for Level of Performance (LP).
Be guided by the descriptions below:
- I was able to do/perform the task without any difficulty. The task helped me in understanding the target content/ lesson.
✔ - I was able to do/perform the task. It was quite challenging, but it still helped me in understanding the target content/lesson.
? – I was not able to do/perform the task. It was extremely difficult. I need additional enrichment activities to be able to do/perform this task.

Learning Task L Learning Task L Learning Task L Learning Task L

P P P P
Number 1 Number 3 Number 5 Number 7
Number 2 Number 4 Number 6 Number 8

VII. REFERENCES Teaching Guide for Senior High School Fundamentals of Accountancy Business and Management 1. Commission
on Higher Education 2016.
QuexhubPERC Learning Portal

Josephine P. Canlas/ Adora G. del Mundo/ Cherie L.

Prepared by: Eva C. Topacio Checked by:
Logatoc/ Feliz A. Tayao