Sheet (3)

Tegara English
First year
SECOND TERM

Chapter (6)
Accounting for
purchases

Edited by Dr/ Magdy Kamel

Tel/ 01273949660

1 | Page Dr. Magdy Kamel

1. merchandising company is an enterprise that buys and sells goods to earn revenue.

 Merchandising companies that purchase and sell directly to consumers are called
retailers
 Merchandising companies that sell to retailers are known as wholesalers.
 The Primary source of revenue is the sales of merchandise

Two categories of expenses for merchandising companies are

(1) Cost of goods sold, (2) Operating expenses

 Sales revenue less cost of goods sold is called gross profit.

 After gross profit is calculated, operating expenses are deducted to determine net
income ( or loss).

A merchandising company may use either a perpetual or a periodic inventory system in

determining cost of goods sold

(1) perpetual inventory system (2) periodic inventory system

‫نظام الجرد الدائم او المستمر‬ ‫نظام الجرد الدورى‬
 Maintain detailed records of the
 Do not keep detailed records of
cost of each inventory purchase
the goods on hand.
and sale.

 Records continuously show

inventory that should be on
hand for every item.
Notes that
1. cost of goods sold is recorded
with each sale
Notes that
1. Cost of goods sold determined
by count at the end of the
accounting period.

2. Purchases of merchandise are 2. Purchases of merchandise are

debited to Inventory. debited to Purchases.

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3 | Page Dr. Magdy Kamel
Under periodic inventory system

Calculation of Cost of Goods Sold:

Purchase xxxx
Less : purchase returns and allowance xx
Purchase discounts xx (xxx)
= Net purchases xxxx
Add: freight in xx__
Cost of goods purchased xxxx

Beginnings inventory xx
(+) Cost of goods purchased xx
= Cost of goods available for sale xx
(-) ending inventory (xx)
= cost of goods sold xxxx

 Net sales = sales revenue – sales returns and allowances – sales discounts
So, Sales discounts is a contra revenue accounts
 Net purchase = purchase – purchase returns & allowances – purchase discount

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 Single & multiple income statement
First: single income statement

Second: multiple income statement

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 True/False
1. Measuring net income for a merchandising company is conceptually the same as for a
service company.
o True False

2. The cost of goods sold is determined only at the end of the accounting period under a
perpetual inventory system.
o True False

3. Under the perpetual inventory system, the purchase of merchandise is recorded with
a debit to the Purchases account.
o True False

4. Sales Discounts is a contra revenue account and has a debit balance.

o True False

5. A customer may receive a sales discount for goods that are damaged or defective.
o True False

6. In a single-step income statement, gross profit and operating income are shown on
the income statement.
o True False

7. In the balance sheet, inventory is reported as a current asset immediately below

accounts receivable.
o True False

8. Income from operations is determined by subtracting other expenses and losses from
gross profit.
o True False
9. Merchandising companies report nonoperating activities in the income statement
immediately after the company’s primary operating activities.
o True False

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10. In preparing a worksheet for a merchandising firm, all income statement column
debits represent expenses.
o True False

Multiple Choice
1. Sales Discounts
a. is a contra revenue account.
b. has a normal debit balance.
c. appears on the income statement.
d. all of the above.

2. When a company uses the perpetual method of accounting for inventories the
a. Inventory account does not change until the end of the year.
b. Inventory account is debited when inventory is purchased
and Cost of Goods Sold is debited when inventory is sold.
c. sale of inventory requires a credit to Cost of Goods Sold.
d. acquisition of merchandise requires a debit to Purchases.

3. The recording of a sale requires a

a. credit to a sales account and a debit to an asset account.
b. debit to Cash and a credit to Owner’s Capital.
c. debit to a sales account and credit to an asset account.
d. credit to Sales Revenue and a debit to Sales Discounts.

4. Which of the following would not be considered an operating expense?

a. Cost of goods sold b. Rent expense
c. Freight-out d. Office expense

5. Which of the following is reported on both a multiple-step and a single-step income

statement?
a. Gross profit b. Income from operations
c. Other revenues and gains d. Net sales

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 Inventories
There are three methods of recording purchases & sales under different prices.

1) First In First Out  FIFO ‫اللى اشتريته فى االول يتباع فى االول‬

2) Last In First Out  LIFO ‫اللى اشتريته فى االخر يتباع فى االول‬
3) Weighted Average Method
4. Specific identification ‫طريقة التحديد‬
Example
Ahmed Company uses the Periodic Inventory System, the following transactions show
beginning inventory & purchases of Product No.M25 for the month of July.

 1 July Beginning Inventory, 3,000 Units, Cost 5 Each ……….. 15,000

 6 July Purchases, 5,000 Units, Cost 6 Each ………….…………… 30,000
 17 July Purchases, 6,000 Units, Cost 7 Each …………….……….. 42,000
 23 July Purchases, 4,000 Units, Cost 8 Each ……………………….. 32,000
 26 July Purchases, 2,000 Units, Cost 9 Each ……………………….. 18,000
137,000
A physical count indicates 4,000 units in inventory at the end of July.
Required
a) determine both the cost of goods sold & ending inventory, using the following
methods and determine the gross profit under each cases if the sale price is $10

1) FIFO Method 2) LIFO Method 3) Average cost Method

Solution
Data
 total unit = 3,000 + 5,000 + 6,000 + 4,000 +2,000 = 20,000 units
 Ending inventory = 4,000 units
 Total Units Sold (COGS) = 20,000 – 4,000 = 16,000 Units
 Sales revenues = 16,000 units × $10 = $160,000
1) FIFO Method ‫الوارد اوال يباع اوال‬
1. Cost Of Goods Sold = 3,000 × 5 = 15,000
+ 5,000 × 6 = 30,000

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 + 6,000 × 7 = 42,000
+ 2,000 × 8 = 16,000 103,000  Cost Of Goods Sold

2. Ending Inventory = 2,000 × 8 = 16,000

+ 2,000 × 9 = 18,000 34,000  Ending Inventory

3. Gross profit = sales revenue – COGS = 160,000 – 103,000 = 57,000

2) LIFO Method ‫الوارد اخيرا يباع اوال‬

1. Cost Of Goods Sold = 2,000 × 9 = 18,000
+ 4,000 × 8 = 32,000
+ 6,000 × 7 = 42,000
+ 4,000 × 6 = 24,000 116,000  COGS

2. Ending Inventory = (1,000 ×6) + (3,000 × 5) = 21,000

3. Gross profit = sales revenue – COGS = 160,000 – 116,000 = 44,000

3) Average Cost Method ‫المتوسط‬

total cost 137000

Average Cost = total units = 20000 = 6.85 per Unit

1) Cost Of Goods Sold = 16,000 × 6.85 = 109,600

2) Ending Inventory = 4,000 × 6.85 = 27,400
3. Gross profit = sales revenue – COGS = 160,000 – 109,600 = 50,400

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Comments
Case (1)
 If the purchase price is going up (increase) using FIFO method will increase the net income
Because the cost of goods sold under FIFO is low
While using LIFO will decrease the net income because the cost of goods sold is high

FIFO method ‫ استخدم طريقه ال‬,‫لو سعر شراء البضاعة بيزداد فى السوق‬
‫الن البضاعه المباعه اول المده سعرها قليل وبالتالى هتدينى اكبر ربح للشركه باقل تكلفه‬
‫والعكس صحيح‬ Net income ‫بيزيد‬ COGS ‫ملحوظه كل لما يقل ال‬

 If the purchase price is going down ( decrease) using LIFO method will increase the net
income because the cost of goods sold is low
while using FIFO will decrease the net income because the cost of goods sold is high
LIFO method ‫ استخدم طريقه ال‬,‫لما سعر شراء البضاعة بيقل فى السوق‬
‫الن البضاعه المباعه اخر المده سعرها قليل وبالتالى هتدينى اكبر ربح للشركه باقل تكلفه‬
‫والعكس صحيح‬ Net income ‫بيزيد‬ COGS ‫ملحوظه كل لما يقل ال‬

10 | Page Dr. Magdy Kamel