Incorrect Question 10 0 / 0.2 pts Apply concepts from pages 6-1 through 6-4 and page 6-7 of the VLN to answer the following: The company sales were $500,000 they had $10,000 in sales discounts and cost of good sold of $320,000 and operating expenses totaling $120,000. What is the company's gross profit ratio? Carry it out to 1 decimal place. Do not include the % sign in your answer. % 10.2 PART A: Understanding Inventory and Cost of Goods Sold Inventory: Inventory is tangible goods HELD FOR SALE IN THE NORMAL COURSE OF BUSINESS or that will be used in producing goods manufacturer) for sale Merchandisers -Buy Inventory for resale -Wholesalers sell to other stores (retailers) -Retailers sell to consumers (end users) Merchandise Inventory (Inventory) -cost to acquire including shipping & handling Manufacturers -Create Inventory from raw materials to sell to others -three Inventory accounts: -raw material -work in process -finished goods -sell unit only after they are finished (finished goods) Manufacturing Inventory is covered in detail in Intro to Managerial Accounting Cost of Goods Sold (COGS) BI + Purchases -Matching principle in action GAFS -COGS is an Expense - E! COGS -COGS is the cost to the seller of INVENTORY sold to the customer -Goods available for sale (GAFS) are made up of Beginning inventory plus Purchases -The Goods available for sale (GAFS) will either be sold (cost of goods sold) or will remain at the end of the period (ending inventory) Gross Profit -profit from the sale of inventory a subtotal that shows the amount net sales exceed the cost of inventory sold Sales - contra revenues Net sales -cost of goods sold Gross profit Chapter 6 Page 6-1 Find the missing amounts Sales (Total Sales) $1,035,000 Net Sales 100% % 96 Gross Profit Operating Income 24.8% 28.7% 0.1% 28.8% 8.64% 44 Income before tax Net Income INVENTORY COST METHODS Beginning Inventory Purchase 1 Purchase 2 Total Units 2 6 2 19 Cost per unit $100 $101 S103 Total Amount $200 606 206 $1012 Specific identification Inventory Costing Method-directly identifles the units sold First-In, First-Out (FIFO) Most closely represents the actual flow of Inventory COKE MACHINE Purchases occur P2 units x cost P1 units x cost Bl units x cost Costs assigned to units sold Last-In, First-Out (LIFO) COOKIE JAR Purchases occur Costs assigned to units sold P2 units x cost Pi units x cost Bl units x cost Page 6-4 chapter 6 Appendix A: (Periodic) Recording Inventory Transactions Purchases is a temporary account used in the periodic inventory system to keep track of purchases of inventory. It is NOT an asset account, it is part of the calculation of COGS. (B1+ Cost of Purchases = GAFS - El = COGS). Practice GJM, Inc., begins the year with inventory of 525,000 and ends the year with inventory of $12,000. During the year the company purchased inventory with a cost of $185,000 and had net sales of $300,000 Calculate GAFS Calculate COGS Calculate gross profit: Calculate gross profit ratio: More Practice Beginning Inventory Ending inventory Contra revenue Net sales Purchases 57,470 3,150 1,900 88,100 51,100 Calculate gross sales: Calculate COGS: Calculate gross profit: Calculate gross profit ratio: PART C: Other Inventory Reporting Issues Lower-of-Cost-and Net Realizable Value -conservatism -costs versus net realizable value (sales priceless cost to sell) -write-down goes to cost of goods sold ANALYSIS: Inventory Turnover Ratio The inventory turnover ratio is a measure of the effectiveness in managing inventory. Inventory Turnover = Cost of Goods Sold Average Inventory Page 6-7 Chapter 6