Fundamentals of Accountancy,

Business and Management 1

Module 14
ABM – FABM 1
Grade 11: Module 14
First Edition, 2021

Copyright © 2021
La Union Schools Division Region I

All rights reserved. No part of this module may be reproduced in any form
without written permission from the copyright owners.

Development Team of the Module

Author: Rudyna M. Minasalvas, T II
Editor: SDO La Union, Learning Resource Quality Assurance Team

Illustrator: Ernesto F. Ramos Jr., P II

Management Team:
Atty. Donato D. Balderas, Jr.
Schools Division Superintendent
Vivian Luz S. Pagatpatan, Ph.D
Assistant Schools Division Superintendent
German E. Flora, Ph.D, CID Chief
Virgilio C. Boado, Ph.D, EPS in Charge of LRMS
Lorna O. Gaspar, EPS in Charge ABM
Michael Jason D. Morales, PDO II
Claire P. Toluyen, Librarian II
 Target

A business enterprise either purchases goods or manufactures goods to sell

in the market. Cost of goods sold is computed to know the profit earned (Gross Profit)
or loss incurred (Gross Loss) from the trading activities of a business for a particular
period.
This lesson is focused on the merchandising type business. This type of
business sells products but does not make them. Therefore, these types of
businesses have the cost of goods sold.
This module aims to teach you to prepare a Statement of Cost of Goods and
Gross Profit.
This module composed of one lesson:
➢ Preparation of the statement of Cost of Goods Sold and Gross Profit.
(ABM_FABM11-IVe-j-41)

Subtask:
➢ Define cost of goods sold and gross profit;
➢ Identify the accounts included in the computation of the Cost of Goods
Sold and gross profit.
➢ Illustrate the computation of the cost of goods sold and gross profit in a
business.
➢ Prepare statement of cost of goods sold and gross profit.

The activity below will help you to check your knowledge about the topic.
 Jumpstart
For you to understand the lesson well, do the following activities.
Have fun and good luck!

Enrichment Activity 1: Evaluate us! (5 minutes)

Direction: Evaluate the different business establishments and answer the given
question below. Write your answer on a separate sheet of paper. (5 minutes to finish)

Which of the following does NOT have Cost of Goods Sold in its income statement?
Why?

LAW Firm SARI- SARI STORE

Water Refilling Station Pharmacy

Answer: _________________________________________________________________________

__________________________________________________________________________________

__________________________________________________________________________________

Discover

The Statement of Cost of Goods is an important metric on the financial

statement as it is subtracted from company’s revenues to measure its gross profit.
The Gross Profit statement determine the profitability and evaluates how efficient the
company’s in managing its expenses and supplies in the production process.

For you to understand the lesson well, let's define the accounting terms found in the Statement of
Cost of Goods Sold and gross profit.

Cost of Goods Sold

➢ Cost of goods sold represents the expense a business incurred to buy or
make a product.
➢ Sometimes abbreviate as COGS or called “Cost of Sales”
Inventory

➢ Goods that are held for sale to customers in the normal course of business.
Examples: Candies, canned goods, noodles sold at the grocery store.

There are two systems to account inventory: the perpetual system and periodic
system.
1. Perpetual Inventory System – Detailed records on the cost each item sold is
determined from records when the sale occurs. For example, a car dealership has a
separate inventory records for each vehicle. Traditionally been used by the companies
sell merchandise with high unit values such as automobiles, furniture, and major
home appliances.

• Record purchase of inventory

• Record revenue and record cost of goods sold when the item is sold.
• At the end of the period, no entry is needed except to adjust inventory
for losses, etc.

2. Periodic Inventory System – Cost of goods sold determined only at the end
of the accounting period. This system involves:
• Record purchase of Inventory
• Record revenue only when item is sold.
• At the end of the period, you must compute cost of goods sold (COGS)

Sales

➢ Activities involved in selling products or services in return for money or

other compensation.
Sales Return and Allowances:

Sales returns result when a customer’s are dissatisfied with merchandise

and are allowed to return the goods to the seller.
Sales Discount

Refers to the reduction in the amount due from a customer as a result of early
payment.
Freight

The process of transporting commodities, goods, and cargo by land, sea, or

air. Freight shipping is key for getting goods to a destination on time, safely, and in
a cost-effective manner.
Sales agreement should indicate whether the seller or the buyer will pay the
cost of transporting the goods to the buyer’s place. The two most common
arrangements for freight cost are FOB SHIPPING POINT AND FOB DESTINATION.
Free on board (FOB) is a trade term used to indicate whether the buyer or the
seller is liable for goods that are lost damaged, or destroyed during shipment.

• FOB Shipping Point:

* Goods placed free on board (FOB) the carrier by seller.
* Buyer pays freight costs.
 * Cash is credited the goods come on delivery (COD), for example, and was
paid immediately. Accounts Payable would be credited if on account.
• FOB Destination
*Goods placed free on board (FOB) at buyer’s business.
* Seller pays freight cost
* Delivery expense is debited if seller pays freight on outgoing merchandise
to a buyer
* Ownership over the goods is transferred to the buyer once the goods are
delivered and received by the seller
Ending Inventory

This is the value of goods still available for sale and held by a company at the
end of accounting period.

Expenses

This is the cost of operations that a company incurs to generate revenue.

Common expenses include payments to suppliers, employees wages, etch.

Statement of Cost of Goods Sold under Perpetual Inventory System and

Periodic Inventory System:

If the business entity uses a perpetual inventory system, cost of goods sold is
being calculated every time a sale takes place. In this case, no calculation is needed.
We can simply take the amount from the cost of goods sold account on the trial
balance.
If the business uses a periodic inventory system, you must do some
calculations to figure out the cost of goods sold. Under a periodic inventory system,
all goods purchased are placed in the purchases account, not in the inventory
account. When sales are recorded, there is no adjustment to inventory and cost of
goods, not like there is in a perpetual system. Therefore, at the end of the year, you
must look how much is purchased and physically count how much inventory is left
to manually calculate the cost of goods sold.

Beginning Inventory Purchases

Goods available for sale

Cost of Goods Sold Ending Inventory

Under a periodic system, just add the beginning inventory to the cost of
purchases. This gives us goods available for sale. Goods available for sale this is
the maximum value of goods that could be sold. At the end of the year if there is no
inventory left the goods available for sale would be equal to cost of goods sold, but if
there is remaining inventory, subtract the ending inventory from goods available for
sale to calculate cost of goods sold.

To calculate cost of goods sold under a periodic inventory system:

Beginning Inventory xxx
Plus: Purchases xxx
= Goods Available for sale xxx
Less: Ending Inventory (xxx)
= Cost of Goods Sold xxx
Or
Beginning Inventory xxxx
Plus: Purchases xxxx
Freight In xxxx
Less: Purchase Return and Allowances (xxxx)
Purchase Discount (xxxx)
Net Purchases xxxx
Cost of Goods Available for sale xxxx
Less: Ending (xxxx)
Cost of Goods Sold xxxx
Example:

J_NELL Pencil Company sells pencils to office supply stores and other retailers
around the world. On January 01, the company’s inventory was Php. 41,000. During
the year, the company purchased Php. 895,000 worth of pencils. A physical count of
the inventory on December 31 revealed that there were Php. 23,000 worth of pencils
remaining. Calculate cost of goods sold for the year.

Answer: Beginning Inventory Php. 41,000

Add: Purchases 895,000
Goods Available for Sale Php. 936,000
Less: Ending Inventory (23,000)
Cost of Goods Sold Php. 913,000

What is a Gross Profit?

The gross profit is the total sales of the firm minus the total cost of goods sold.
The total sales are all the goods sold by the business.

To calculate cost of goods sold and gross profit:

SALES xxx
Less: Cost of Goods Sold xxx
Gross Profit xxx

Putting together the cost of Goods Sold and Gross Profit in the Income
Statement

• Cost of Goods Sold is reported on the Income Statement and can be considered as
an expense of the accounting period.
Example: XYZ General Merchandise
Schedule of Cost of Goods Sold
For the month of January 2021

Sales Php. 200,000.00

Merchandise Inventory, Beginning Php.100,000.00
Add: Purchases Php. 50,000.00
Freight-In 2,000.00
Less: Purchase Returns (1,000.00)
Purchase Discount (500.00)
Cost of Goods Available for sale Php.150,500.00
Less: Merchandise Inventory Ending (10,500.00)
Cost of Goods Sold Php. 140,000.00
Gross Profit Php. 60,000.00
Less: Expenses
Salaries Expense Php. 2,000.00
Advertising Expense 5,000.00 7,000.00
Net Income 53,000.00

Explore

Here are some enrichment activities for you to work on to master and strengthen the basic
concepts you have learned from this lesson.

Enrichment Activity 2 (5 minutes): MATCH ME!

Direction: Match Column A to Column B. Write your answers in the answer sheet.

Column A Column B
1. The cost of merchandise that a retailer, A. Sales
distributor, or manufacturer has sold.
2. Occurs when a buyer returned merchandise B. Revenue
that it has purchased from supplier. C. Cost of Goods sold
3. Describes the activities that lead to the selling D. Freight In
of goods or services. E. Purchase return and
4. Total amount of income generated by the sale allowances
of goods and services related to the company’s
primary operations.
5. The term refers to the commercial transportation
of goods by any means, either by land, air, sea.
Enrichment Activity 3 ( 5 minutes): COMPLETE ME!
Directions: Supply the missing letters to complete the concepts using the given clues.
Write answers on a separate sheet of paper.

1. This is part of the cost of the merchandise and should be included in inventory if
the merchandise has not been sold.

2. The profit a company makes after deducting the costs associated with making and
selling its products, or the costs associated with providing its services.
.
S O

3. This method provides a more accurate and efficient way to account for inventory.

U E

4. This is the accumulated total of all costs used to create a product or service, which
has been sold.

S D L
5. An account in which records are kept of transactions involving the buying of goods,
either on credit or for cash.
H

Deepen
Let’s apply what you have learned.

Enrichment Activity 4: I’ll show you my figure & give me your solution!
Direction: Read and understand the problem below calculate the cost of goods sold
and gross profit. Write your answer on a separate sheet of paper. (10 minutes)
Problem A

Shoe keeper had bought 100 footballs for Ph.30.00 each. One football
player comes and bought 10 footballs for 50.00 each. Calculate the cost of goods
sold. Show your solution.
Problem B

XYZ Company has Beginning Inventory Php. 100,000, New Purchases

amounting to Php. 450,000 and Ending Inventory is Php. 35,000. Find the cost of
goods sold for XYZ Company.

Problem C

I sell T-shirts, I bought them from the manufacturer for 500.00 for each t-
shirt. I sold them at 800.00 each. In the month of February, I decided to buy 10
pieces of t-shirts and only seven t-shirts were sold.

Compute the cost of goods sold and gross profit. Show your solution.

Gauge

I. Directions: Choose the best answer. Use a separate sheet of paper for your
answers. (about 5-10 minutes to finish)

1. What kind of inventory system most applicable to sari-sari stores?

A. Merchandise Inventory C. Perpetual Inventory system
B. Merchandisers D. Periodic Inventory System
2. What accounting term is used for the cost of goods unsold at the end of the
accounting period?
A. Cost of Goods Unsold C. Perpetual Inventory
B. Merchandise Inventory D. Periodic Inventory
3. Cost of Goods Sold (COGS) includes the following EXCEPT:
A. Factory overhead expenses.
B. The cost of storing products the business sells.
C. Indirect labor costs for workers who produce the products
D. The cost of products or raw materials, including freight or shipping charges.

4. The following are COGS formula to found in the cost of goods sold during an
accounting period
A. Gross Income= Gross Revenue-COGS
B. Net Income+ Revenue-COGS- Expenses
C. Beginning Inventory+ Purchases During the Period-Ending Inventory.
D. Beginning Inventory – Purchase Return and Allowances – Ending Inventory.
5. Which of the following statement are TRUE?
A. Cost of goods sold is also know as cost of sales.
B. Cost of goods sold is the direct cost of inventory that we have sold during the
year.
C. Cost of goods sold is an expense charged against sales to work out a gross
profit.
D. None of the above
6. Which of the following describes a sales return?
A. A customer receives a price discount for buying bulk.
B. A customer return merchandise that is defective to the seller.
C. An amount that a business receives from selling its goods or services.
D. A customer does not return defective merchandise but receives a reduction in
the amount it owes to the seller.
7. What cost associated with transporting goods from seller’s to buyer’s place of
business?
A. Cost of Goods Sold C. Transportation Expense
B. Freight D. Transportation of Goods Expense

8. How do you calculate cost of goods sold on an income statement?

A. COGS+ Beginning Inventory+ Purchases During the Period-Ending Inventory.
B. COGS Beginning Inventory+ Additional Inventory – Ending Inventory
C. Gross Income= Gross Revenue-COGS
D. Net Income+ Revenue-COGS- Expenses

9. Cost of goods sold is classified as which type of account?

A. Asset C. Liability
B. Expense D. Revenue
10. Mrs. Huazz Sari-Sari store has a net sales of Php. 10,000 and the cost of goods
sold are Php. 6,000. What is the gross profit of Mrs. Huazz at the end of the month?
A. Php. 4,000 B. Php. 6,000 C. Php. 10,000 Php. 16.000

II. Direction: In 20 minutes read and analyze the situation below then prepare the
needed statement.

The following data was taken from ledger account balances and supplementary data
for ABM Company.

Merchandise inventory beginning Php. 20,000.00

Merchandise inventory, ending 23,000.00
Purchases 215,000.00
Purchase discounts 6,000.00
Purchase Return and Allowances 3,000.00
Sales 400,000.00
Freight-in 1,800.00

Required: Prepare statement of cost of goods sold and gross profit for the year
ended December 31, 2020. In proper format, show the computation. Write your
answer on the separate sheet of paper. (15-20 minutes to finish)
 Deepen
Gauge:
Multiple ABM Company
Choice Income Statement
December 31, 2020
1. D Sales Php. 400,000.00
2. B Add. Beginning Inventory Php. 20,000.00
3. C Purchases 215,000.00
4. B Freight In 1,800.00
5. C Less: Purchase Discount (6,000.00)
6. B Purchase Ret. & Allowances (3,000.00)
7. B Cost of Goods Available for sale Php. 227,000.00
8. B Less Ending Inv. 23,000.00
9. B Cost of Goods Sold Php. 204,800.00
Cost of Goods Sol Php. 195,200.00
10. A
Deepen: 5. Purchases
Enrichment Activity 3 Sold
Problem A. 4. Cost of Goods
Sales (10x50) Php. System
500.00
Less: Cost of Goods Sold 300.00
Inventory
Gross Profit 3. Perpetual Explore:
200.00 2. Gross Profit Enrichment
1. Freight Activity 2:
Activity No. 3 1. C
Enrichment 2. E
Problem B 3. A
Beg. Inventory Php. 100,000 4. B
Explore:
Purchases 45,000 5. D
Ending Inventory (35,000)
COGS Php. 515,000
Answer Key
https://corporatefinanceinstitute.com/resources/knowledge/accounting/cost-of-goods-sold-cogs/
https://accountinginfocus.com/managerial-accounting-2
Website:
Accountancy, Business and Management (pp. 154-167). Diliman, Quezon City.
Commission on Higher Education. (2016). Teaching Guide for Senior High School in Fundamentals of
Printed Materials:
References