1-1
Accounting
Accounting for
for Management
Management and
and decision
decision
Making
Making
Prof.
Prof. Ahmed
Ahmed Farghally
Farghally
Professor
Professor of
of Accounting,
Accounting, Cairo
Cairo University
University
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-2
Part (1)
Introducing Accounting
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-3
The
accounting
process
Economic
activities
Actions
(decisions)
McGraw-Hill/Irwin
Accounting
“links” decision
makers with
economic
activities ⎯ and
with the results of
their decisions.
Accounting
information
Decision
makers
© The McGraw-Hill Companies, Inc., 2005
1-4
Types
Types of
of Accounting
Accounting Information
Information
Financial
Tax
Managerial
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Information
Information System
System
Information
Information
Users
Users
yInvestors
yInvestors
yCreditors
yCreditors
yManagers
yManagers
yOwners
yOwners
yCustomers
yCustomers
yEmployees
yEmployees
yRegulators
yRegulators
-SEC
-SEC
-IRS
-IRS
-EPA
-EPA
McGraw-Hill/Irwin
Financial
Financial
Information
Information
Provided
Provided
yProfitability
yProfitability
yFinancial
yFinancial
position
position
yCash
yCashflows
flows
1-5
Decisions
Decisions
Supported
Supported
yPerformance
yPerformance
evaluations
evaluations
yStock
yStock
investments
investments
yTax
yTaxstrategies
strategies
yLabor
yLaborrelations
relations
yResource
yResource
allocations
allocations
yLending
yLending
decisions
decisions
yBorrowing
yBorrowing
© The McGraw-Hill Companies, Inc., 2005
Basic
Basic Functions
Functions of
of an
an Accounting
Accounting
System
System
1-6
n Interpret
and record
business
transactions.
Payment
Car
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Basic
Basic Functions
Functions of
of an
an Accounting
Accounting
System
System
n Interpret
and record
business
transactions.
McGraw-Hill/Irwin
o Classify
similar
transactions
into useful
reports.
1-7
p Summarize
and
communicate
information to
decision
makers.
© The McGraw-Hill Companies, Inc., 2005
External
External Users
Users of
of Accounting
Accounting
Information
Information
1-8
•Owners
•Creditors
•Labor unions
•Governmental agencies
•Suppliers
•Customers
•Trade associations
•General public
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-9
(Specific)
Provide information about economic
resources, claims to resources, and
changes in resources and claims.
Objectives
of
Financial
Reporting
Provide information useful in
assessing amount, timing and
uncertainty of future cash flows.
Provide information useful in making
investment and credit decisions.
(General)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Objectives
Objectives of
of External
External Financial
Financial
Reporting
Reporting
1-10
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
The primary
financial
statements.
© The McGraw-Hill Companies, Inc., 2005
Characteristics
Characteristics of
of Externally
Externally Reported
Reported
Information
Information
1-11
AAMeans
Meansto
to
an
anEnd
End
Usefulness
Usefulness
Enhanced
Enhancedvia
via
Explanation
Explanation
Broader
Broaderthan
than
Financial
Financial
Statements
Statements
Based
Basedon
on
General-Purpose
General-Purpose
Assumption
Assumption
Historical
Historicalin
in
Nature
Nature
Results
Resultsfrom
fromInexact
Inexactand
and
Approximate
ApproximateMeasures
Measures
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Users
Users of
of Internal
Internal Accounting
Accounting
Information
Information
1-12
z Board of directors
z Chief executive officer (CEO)
z Chief financial officer (CFO)
z Vice presidents
z Business unit managers
z Plant managers
z Store managers
z Line supervisors
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Typical Simple Organization Chart
1-13
Board of
Directors
(Owners)
Chief Executive
Officer
(CEO)
Business Unit
Manager
Plant
Manager
Plant
Manager
Plant
Accountant
Plant
Accountant
McGraw-Hill/Irwin
V.P. Human
Resources
V.P. Information
Services
Chief Financial
Officer (CFO)
© The McGraw-Hill Companies, Inc., 2005
Objectives
Objectives of
of Management
Management Accounting
Accounting
Information
Information
1-14
To
Tohelp
helpachieve
achieve
goals
goalsand
andmissions
missions
To
Tohelp
helpevaluate
evaluate
and
andreward
reward
decision
decisionmakers
makers
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Characteristics
Characteristics of
of Management
Management
Accounting
Accounting Information
Information
1-15
Timeliness
Timeliness
AAMeans
Meansto
to
an
anEnd
End
Identify
Identify
Decision
Decision
Maker
Maker
Measures
Measuresof
of
Efficiency
Efficiencyand
and
Effectiveness
Effectiveness
Oriented
Oriented
Toward
Toward
Future
Future
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-16
Integrity
Integrity of
of Accounting
Accounting Information
Information
Institutional Features
yGenerally Accepted Accounting Principles (GAAP)
yFinancial Accounting Standards Board
ySecurities and Exchange Commission
yInternal Control Structure
yAudits
yLegislation
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-17
Integrity
Integrity of
of Accounting
Accounting Information
Information
Professional Organizations
yAmerican Institute of Certified Public Accountants
yInstitute of Management Accountants
yInstitute of Internal Auditors
yAmerican Accounting Association
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-18
Integrity
Integrity of
of Accounting
Accounting Information
Information
Competence, Judgment and Ethical Behavior
yCertified Public Accountants (CPAs)
yCertificate in Management Accounting (CMA)
yCertificate in Internal Auditing (CIA)
yCode of Professional Conduct
CPA
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-19
Integrity
Integrity of
of Accounting
Accounting Information
Information
Careers in Accounting
yPublic Accounting
yManagement Accounting
yGovernmental Accounting
yAccounting Education
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-20
End
End of
of Part
Part (1)
(1)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-21
Part (2)
FINANCIAL STATEMENTS
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-22
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Three primary
financial
statements.
We will use a corporation
to describe these
statements.
© The McGraw-Hill Companies, Inc., 2005
1-23
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Describes
where the
enterprise
stands at a
specific date.
© The McGraw-Hill Companies, Inc., 2005
1-24
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Depicts the
revenue and
expenses for a
designated
period of time.
© The McGraw-Hill Companies, Inc., 2005
1-25
Introduction
Introduction to
to Financial
Financial Statements
Statements
Revenues
result in
positive
cash flow.
Expenses
result in
negative
cash flow.
Either in the past, present, or future.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-26
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Net income (or
net loss) is
simply the
difference
between
revenues and
expenses.
© The McGraw-Hill Companies, Inc., 2005
1-27
Introduction
Introduction to
to Financial
Financial Statements
Statements
Balance Sheet
Income Statement
Statement of Cash Flows
McGraw-Hill/Irwin
Depicts the
ways cash has
changed during
a designated
period of time.
© The McGraw-Hill Companies, Inc., 2005
A
A Starting
Starting Point:
Point: Statement
Statement of
of
Financial
Financial Position
Position
1-28
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-29
The
The Concept
Concept of
of the
the Business
Business Entity
Entity
Vagabond
Travel
Agency
McGraw-Hill/Irwin
A business
entity is
separate from
the personal
affairs of its
owner.
© The McGraw-Hill Companies, Inc., 2005
1-30
Assets
Assets
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Assets are
economic resources
that are owned by
the business and
are expected to
provide positive
future cash flows.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-31
Assets
Assets
Cost Principle
These accounting
Stable-Dollar principles support Going-Concern
cost as the basis
Assumption
Assumption
for asset valuation.
Objectivity
Principle
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-32
Liabilities
Liabilities
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Liabilities are
debts that
represent negative
future cash flows
for the enterprise.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-33
Owners’
Owners’ Equity
Equity
Vagabond Travel Agency
Balance Sheet
December 31, 2005
Assets
Liabilities & Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity:
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
Owners’ equity
represents the
owners’ claims to
the assets of the
business.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-34
Owners’
Owners’ Equity
Equity
Changes in Owners’
Equity
•Owners’
Investments
•Payments
to Owners
•Business
Earnings
•Business
Losses
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-35
The
The Accounting
Accounting Equation
Equation
Travel
Assets
Liabilities
++ Agency
Owners’
Assets ==Vagabond
Liabilities
Owners’ Equity
Equity
Balance Sheet
December 31, 2005
$300,000
$220,000
$300,000
= $80,000
$80,000 +Liabilities
+
$220,000
Assets=
& Owners' Equity
Cash
$ 22,500 Liabilities:
Notes receivable
10,000
Notes payable
$ 41,000
Accounts receivable
60,500
Accounts payable
36,000
Supplies
2,000
Salaries payable
3,000
Land
100,000
Total liabilities
$ 80,000
Building
90,000 Owners' Equity
Office equipment
15,000
Capital stock
150,000
Retained earnings
70,000
Total
$ 300,000 Total
$ 300,000
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-36
Let’s analyze
some
transactions for
JJ’s Lawn Care
Service.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-37
On May 1, 2005, Jill Jones and her family
invested $8,000 in JJ’s Lawn Care Service and
received 800 shares of stock.
Cash
Total
McGraw-Hill/Irwin
JJ's Lawn Care Service
Balance Sheet
May 1, 2005
Owners' Equity
Assets
$ 8,000 Capital Stock
$
$
8,000 Total
$
8,000
8,000
© The McGraw-Hill Companies, Inc., 2005
1-38
On May 2, JJ’s purchased a riding lawn
mower for $2,500 cash.
JJ's Lawn Care Service
Balance Sheet
May 2, 2005
Owners' Equity
Assets
Cash
$ 5,500 Capital Stock
$
Tools & Equipment
2,500
Total
McGraw-Hill/Irwin
$
8,000 Total
$
8,000
8,000
© The McGraw-Hill Companies, Inc., 2005
1-39
On May 8, JJ’s purchased a $15,000 truck.
JJ’s paid $2,000 down in cash and issued a note payable
for the remaining $13,000.
JJ's Lawn Care Service
Balance Sheet
May 8, 2005
Liabilities and Owners' Equity
Assets
Cash
$ 3,500 Liabilities:
Tools & Equipment
2,500 Notes Payable
$ 13,000
Truck
15,000 Owners' Equity:
Capital Stock
8,000
Total
McGraw-Hill/Irwin
$ 21,000 Total
$ 21,000
© The McGraw-Hill Companies, Inc., 2005
1-40
On May 11, JJ’s purchased some repair
parts for $300 on account.
JJ's Lawn Care Service
Balance Sheet
May 11, 2005
Liabilities and Owners' Equity
Assets
Cash
$ 3,500 Liabilities:
Tools & Equipment
2,800 Notes Payable
$ 13,000
Truck
15,000 Accounts Payable
300
Total Liabilities
$ 13,300
Owners' Equity:
Capital Stock
8,000
Total
McGraw-Hill/Irwin
$ 21,300 Total
$ 21,300
© The McGraw-Hill Companies, Inc., 2005
1-41
End
End of
of Part
Part (2)
(2)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-42
Part (3)
ACCOUNTING REPORTING of
FINANCIAL RESULTS
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2005
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depreciation exp.: tools & eq.
50
Depreciation exp.: truck
250
Total
$ 22,200 $ 22,200
McGraw-Hill/Irwin
This
This is
is the
the
Adjusted
Adjusted Trial
Trial
Balance
Balance for
for JJ’s.
JJ’s.
1-43
Now,
Now, let’s
let’s
prepare
prepare the
the
financial
financial
statements
statements for
for
JJ’s
JJ’s Lawn
Lawn Care
Care
Service
Service for
for May.
May.
© The McGraw-Hill Companies, Inc., 2005
1-44
JJ's Lawn Care Service
Income Statement
For the month ending May 31, 2005
Sales revenue
Operating expenses:
Gasoline expense
$ 50
Depr. exp.: tools & eq.
50
Depr. exp.: truck
250
Net income
$ 750
350
$ 400
Net
Net income
income also
also appears
appears on
on the
the
Statement
of
Retained
Earnings.
Statement
of
Retained
Earnings.
© The McGraw-Hill Companies, Inc., 2005
McGraw-Hill/Irwin
1-45
Statement
Statement of
of Retained
Retained Earnings
Earnings
This statement summarizes the increases
and decreases in Retained Earnings during
the period.
•Business
Earnings
McGraw-Hill/Irwin
•Dividends
•Business
Losses
© The McGraw-Hill Companies, Inc., 2005
1-46
JJ's Lawn Care Service
Statement of Retained Earnings
For the Month Ended May 31, 2005
Retained earnings, May 1
Add: Net income
Subtotal
Less: Dividends
Retained earnings, May 31
$
400
$ 400
200
$ 200
Now, let’s prepare the Balance Sheet.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
JJ's Lawn Care Service
Balance Sheet
May 31, 2005
1-47
Assets
Cash
Accounts receivable
Tools & equipment
$ 2,650
Less: Accum. depr.: tools & eq.
50
Truck
$ 15,000
Less: Accum. depr.: truck
250
Total assets
Liabilities & Stockholders' Equity
Liabilities:
Notes payable
Accounts payable
Total liabilities
Stockholders' equity:
Capital stock
$ 8,000
Retained earnings
200
Total stockholders' equity
Total liabilities & stockholders' equity
McGraw-Hill/Irwin
$
3,925
75
2,600
14,750
$ 21,350
$ 13,000
150
$ 13,150
8,200
$ 21,350
Next,
Next, let’s
let’s
prepare
prepare the
the
Statement
Statement of
of
Cash
Cash Flows
Flows
for
for JJ’s
JJ’s Lawn
Lawn
Care
Care Service
Service
for
for May.
May.
© The McGraw-Hill Companies, Inc., 2005
JJ's Lawn Care Service
Statement of Cash Flows
For the Month Ended May 31, 2005
Cash flows from operating activities:
Cash received from revenue transactions $
750
Cash paid for expenses
(50)
Net cash provided by operating activities
$
700
Cash flows from investing activities:
Purchase of lawn mower
$ (2,500)
Purchase of truck
(2,000)
Collection for sale of repair parts
75
Payment for repair parts
(150)
Net cash used by investing activities
(4,575)
Cash flows from financing activities:
Investment by owners
$ 8,000
Dividends
(200)
Net cash provided by financing activities
7,800
Increase in cash for month
$ 3,925
Cash balance, May 1, 2005
Cash balance, May 31, 2005
$ 3,925
McGraw-Hill/Irwin
1-48
© The McGraw-Hill Companies, Inc., 2005
Drafting
Drafting Notes
Notes to
to the
the Financial
Financial
Statements
Statements
Notes to the
Financial Statements
1-49
Examples
Examplesof
ofItems
ItemsDisclosed
Disclosed
yLawsuits
yLawsuitspending
pending
yScheduled
yScheduledplant
plantclosings
closings
yGovernmental
yGovernmentalinvestigations
investigations
ySignificant
ySignificantevents
eventsoccurring
occurring
after
afterthe
thebalance
balancesheet
sheetdate
date
ySpecific
ySpecificcustomers
customersthat
that
account
accountfor
foraalarge
largeportion
portionof
of
revenue
revenue
yUnusual
yUnusualtransactions
transactionsand
and
related
relatedparty
partytransactions
transactions
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Closing
Closing the
the Temporary
Temporary Equity
Equity
Accounts
Accounts
nClose Revenue accounts
to Income Summary.
oClose Expense accounts
to Income Summary.
1-50
The closing process
gets the temporary
accounts ready for the
next accounting
period.
pClose Income Summary
account to Retained
Earnings.
qClose Dividends to
Retained Earnings.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Closing
Closing the
the Temporary
Temporary Equity
Equity
Accounts
Accounts
JJ's Lawn Care Service
Adjusted Trial Balance
May 31, 2005
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Dividends
200
Sales revenue
750
Gasoline expense
50
Depreciation exp.: tools & eq.
50
Depreciation exp.: truck
250
Total
$ 22,200 $ 22,200
McGraw-Hill/Irwin
1-51
Let’s
Let’s prepare
prepare the
the
closing
closing entries
entries
for
for JJ’s
JJ’s Lawn
Lawn
Care
Care Service.
Service.
© The McGraw-Hill Companies, Inc., 2005
1-52
Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts
Since
Since Sales
Sales Revenue
Revenue has
has aa credit
credit balance,
balance, the
the
closing
closing entry
entry requires
requires aa debit
debit to
to the
the Sales
Sales Revenue
Revenue
account.
account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Sales Reveune
Income Summary
Debit
Credit
750
750
To close the revenue account.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-53
Closing
Closing Entries
Entries for
for Revenue
Revenue Accounts
Accounts
Income Summary
750
Sales Revenue
750
750
-
750
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-54
Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts
Since
Since expense
expense accounts
accounts have
have aa debit
debit balance,
balance, the
the
closing
closing entry
entry requires
requires aa credit
credit to
to the
the expense
expense
accounts.
accounts.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
May 31 Income Summary
350
Gasoline Expense
50
Depreciation Exp.: Tools & Equipment
50
Depreciation Exp.: Truck
To close the expense accounts.
McGraw-Hill/Irwin
Credit
250
© The McGraw-Hill Companies, Inc., 2005
1-55
Closing
Closing Entries
Entries for
for Expense
Expense Accounts
Accounts
Gasoline Exp.
50
50
Depr. Exp.: Tools &
Equipment
50
50
-
Depr. Exp.: Truck
250
250
McGraw-Hill/Irwin
Income Summary
350
750
400
Net Income
© The McGraw-Hill Companies, Inc., 2005
1-56
Closing
Closing the
the Income
Income Summary
Summary Account
Account
Since
Since Income
Income Summary
Summary has
has aa $400
$400 credit
credit balance,
balance,
the
the closing
closing entry
entry requires
requires aa debit
debit to
to Income
Income
Summary.
Summary.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Income Summary
Retained Earnings
Debit Credit
400
400
To close Income Summary.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-57
Closing
Closing the
the Income
Income Summary
Summary Account
Account
Retained Earnings
400
Income Summary
350
750
400
-
400
McGraw-Hill/Irwin
The balance in Income
Summary is now zero.
© The McGraw-Hill Companies, Inc., 2005
1-58
Closing
Closing the
the Dividends
Dividends Account
Account
Since
Since the
the Dividends
Dividends account
account has
has aa debit
debit balance,
balance,
the
the closing
closing entry
entry requires
requires aa credit
credit to
to the
the Dividends
Dividends
account.
account.
GENERAL JOURNAL
Date
Account Titles and Explanation
May 31 Retained Earnings
Dividends
Debit Credit
200
200
To close the Dividends account.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-59
Closing
Closing the
the Dividends
Dividends Account
Account
Dividends
200
200
-
McGraw-Hill/Irwin
Retained Earnings
200
400
200
© The McGraw-Hill Companies, Inc., 2005
JJ's Lawn Care Service
After-Closing Trial Balance
May 31, 2005
Cash
$ 3,925
Accounts receivable
75
Tools & equipment
2,650
Accum. depreciation: tools & eq.
$
50
Truck
15,000
Accum. depreciation: truck
250
Notes payable
13,000
Accounts payable
150
Capital stock
8,000
Retained earnings
200
Total
$ 21,650 $ 21,650
McGraw-Hill/Irwin
After
After all
all
closing
closing
entries
entries are
are
made,
made, JJ’s
JJ’s
After-Closing
After-Closing
Trial
Trial Balance
Balance
looks
looks like
like
this.
this.
1-60
© The McGraw-Hill Companies, Inc., 2005
1-61
Evaluating
Evaluating the
the Business
Business
Evaluating
Evaluating
Profitability
Profitability
Evaluating
Evaluating
Liquidity
Liquidity
Did the business earn a
profit or loss in the
current period?
Does the business have
assets available to pay
debts as they become
due?
What is the business’s
future potential for a
profit?
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-62
Evaluating
Evaluating the
the Business
Business
Evaluating
Evaluating
Profitability
Profitability
Evaluating
Evaluating
Liquidity
Liquidity
Net Income
Net Income
=
Percentage
Total Revenue
Working
Current Assets –
=
Capital
Current Liabilities
Return on
Equity
Current
Current Assets
=
Ratio
Current Liabilities
McGraw-Hill/Irwin
=
Net Income
Avg. Stockholders’
Equity
© The McGraw-Hill Companies, Inc., 2005
Preparing
Preparing Financial
Financial Statements
Statements Covering
Covering
Different
Different Periods
Periods of
of Time
Time
1-63
Many
Many companies
companies prepare
prepare financial
financial statements
statements at
at
various
various points
points throughout
throughout the
the year.
year.
Annually
Interim
Financial
Statements
Quarterly
Monthly
Jan. 1
McGraw-Hill/Irwin
Dec. 31
© The McGraw-Hill Companies, Inc., 2005
1-64
End
End of
of Part
Part (3)
(3)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-65
Part (4)
COST ACCOUNTING FOR
MANAGEMENT
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-66
Inventory
Inventory Defined
Defined
Inventory
Inventory
Goods
Goods owned
owned
and
and held
held for
for sale
sale
to
to customers
customers
McGraw-Hill/Irwin
Current
Current
asset
asset
© The McGraw-Hill Companies, Inc., 2005
1-67
The
The Flow
Flow of
of Inventory
Inventory Costs
Costs
BALANCE SHEET
As purchase cost
(or manufacturing
costs) are incurred
Current assets:
Inventory
$
$
INCOME STATEMENT
Revenue
Cost of goods sold
Gross profit
Expenses
Net income
McGraw-Hill/Irwin
as goods
are sold
$
© The McGraw-Hill Companies, Inc., 2005
1-68
The
The Flow
Flow of
of Inventory
Inventory Costs
Costs
In a perpetual inventory system, inventory entries
parallel the flow of costs.
GE N E R AL JOU R N AL
Da te
Account Title s a nd Ex pla na tion
De bit
Cre dit
Entry on P urcha se Da te
Inve ntory
$$$$
Accounts P a ya ble
$$$$
Entry on S a le Da te
Cost of Goods S old
Inve ntory
McGraw-Hill/Irwin
$$$$
$$$$
© The McGraw-Hill Companies, Inc., 2005
1-69
Which
Which Unit
Unit Did
Did We
We Sell?
Sell?
When identical units of inventory have
different unit costs, a question naturally
arises as to which of these costs should be
used in recording a sale of inventory.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Entry on Sale Date
Cost of Goods Sold
Inventory
McGraw-Hill/Irwin
$$$$
$$$$
© The McGraw-Hill Companies, Inc., 2005
1-70
Inventory
Inventory Subsidiary
Subsidiary Ledger
Ledger
AA separate
separate subsidiary
subsidiary account
account is
is maintained
maintained for
for
each
each item
item in
in inventory.
inventory.
Item LL002
Description Laser Light
Location Storeroom 2
Purchased
Date
Sept. 5
Sept. 9
Units
100
75
Sept. 10
Unit
Cost
$ 30
50
Total
$ 3,000
3,750
Sold
Units
Unit
Cost
10
?
Primary supplier Electronic City
Secondary supplier Electric Company
Inventory level: Min: 25 Max: 200
Balance
Cost of
Goods
Unit
Sold
Units
Cost
Total
100
$
30 $ 3,000
100
30
3,000
75
50
3,750
?
?
?
?
?
?
?
How can we determine the unit cost for the Sept. 10 sale?
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-71
Inventory
Inventory Cost
Cost Flows
Flows
We use one of these inventory valuation
methods to determine cost of inventory sold.
Specific
identification
Average
cost
FIFO
LIFO
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Information
Information for
for the
the Following
Following Inventory
Inventory
Examples
Examples
1-72
The Bike Company (TBC)
Cost
Costof
ofGoods
GoodsAvailable
Available for
for Sale
Sale
Aug.
Aug. 11 Beg.
Beg. Inventory
Inventory 10
10 units
units@
@
Aug.
15
Aug. 33 Purchased
Purchased
15 units
units@
@
Aug.
20
Aug. 17
17 Purchased
Purchased
20 units
units@
@
Aug.
10
Aug. 28
28 Purchased
Purchased
10 units
units@
@
$$ 91
91
$$ 106
106
$$ 115
115
$$ 119
119
==
==
==
==
Retail
Retail Sales
Salesof
ofGoods
Goods
Aug.
Aug. 14
14 Sales
Sales
Aug.
Aug. 31
31 Sales
Sales
$$ 130
130
$$ 150
150
== $$ 2,600
2,600
== $$ 3,450
3,450
McGraw-Hill/Irwin
20
20 units
units@
@
23
23 units
units@
@
$$
$$
$$
$$
910
910
1,590
1,590
2,300
2,300
1,190
1,190
© The McGraw-Hill Companies, Inc., 2005
1-73
Specific
Specific Identification
Identification
When
When aa unit
unit
is
is sold,
sold, the
the
specific
specific cost
cost of
of
the
the unit
unit sold
sold is
is
added
added to
to cost
cost of
of
goods
goods sold.
sold.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-74
Specific
Specific Identification
Identification
Date
Aug. 1
Aug. 3
Purchases
Cost of Goods Sold
10
@
$ 91
=
$
910
15
@
$ 106
=
$ 1,590
Inventory
Balance
$
910
$ 2,500
On
On August
August 14,
14, TBC
TBC sold
sold 20
20 bikes
bikes for
for $130
$130 each.
each.
Nine
Nine bikes
bikes originally
originally cost
cost $91
$91 and
and 11
11 bikes
bikes
originally
originally cost
cost $106.
$106.
Continue
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-75
Specific
Specific Identification
Identification
Date
Purchases
Aug. 1 10 @ $ 91 = $ 910
Aug. 3 15 @ $ 106 = $ 1,590
Aug. 14
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
9
@
$ 91
=
$
819
11
@
$ 106
=
$ 1,166
$
515
The
The Cost
Cost of
of Goods
Goods Sold
Sold for
for the
the August
August 14
14 sale
sale is
is
$1,985,
$1,985, leaving
leaving $515
$515 and
and 55 units
units in
in inventory.
inventory.
Continue
McGraw-Hill/Irwin
Let’s look at the entries for
the Aug. 14 sale.
© The McGraw-Hill Companies, Inc., 2005
1-76
Specific
Specific Identification
Identification
GENERAL JOURNAL
Date
Account Titles and Explanation
Aug. 14 Cash
Retail
Retail
Debit
2,600
Sales
14 Cost of Goods Sold
2,600
Cost
Cost
1,985
Inventory
A
A similar
similar entry
entry is
is
made
made after
after each
each sale.
sale.
McGraw-Hill/Irwin
Credit
1,985
Continue
© The McGraw-Hill Companies, Inc., 2005
1-77
Specific
Specific Identification
Identification
Date
Purchases
Aug. 1 10 @ $ 91 = $ 910
Aug. 3 15 @ $ 106 = $ 1,590
Aug. 14
Cost
Cost of
of Goods
Goods
Sold
Sold for
for
August
August 31
31 ==
20 @ $ 115 = $ 2,300
$2,610
10 @ $2,610
$ 119 = $ 1,190
Inventory
Balance
$
910
$ 2,500
Cost of Goods Sold
9
@
$ 91
=
$
819
11
@
$ 106
=
$ 1,166
$
515
$ 2,815
$ 4,005
Aug. 17
Aug. 28
Aug. 31 Additional purchases were made
1 @ $August
91 =
$
91
Additional purchases were madeon
on August17
17and
and28.
28.
3 @ $ 106 =
$ 318
Costs
31 were
as
follows:
1 @ $91,
Costsassociated
associatedwith
withsales
saleson
onAugust
August
15 @31$were
115 as
= follows:
$ 1,725 1 @ $91,
33@
& 4 @ $119.
@$106,
$106,15
15@
@$115,
$115,
$119.
4 @& 4$@
119
=
$ 476 $ 1,395
McGraw-Hill/Irwin
Continue
© The McGraw-Hill Companies, Inc., 2005
1-78
Specific
Specific Identification
Identification
Inventory
Balance
$
910
$
2,500
Cost of Goods Sold
Income Statement
COGS = $4,595
Balance Sheet
Inventory = $1,395
McGraw-Hill/Irwin
9
@
$ 91
=
$
11
@
$ 106
=
$ 1,166
1
@
$ 91
=
$
91
3
@
$ 106
=
$
318
15
@
$ 115
=
$ 1,725
4
@
$ 119
=
$
11
55
66
819
476
$
$
$
515
2,815
4,005
$
1,395
@
@ $$106
106 == $$ 106
106
@
575
@ $$115
115 ==
575
@
714
@ $$119
119 ==
714
End.
End.Inv.
Inv. © The$McGraw-Hill
$1,395
1,395 Companies, Inc., 2005
1-79
Since specific
identification is so
easy, can’t we use it
all the time?
McGraw-Hill/Irwin
Not really. Specific
identification is hard to use
when we sell a lot of
inventory that has lots of
different costs.
© The McGraw-Hill Companies, Inc., 2005
1-80
Average-Cost
Average-Cost Method
Method
When a unit is sold,
the average cost of each unit
in inventory is assigned to
cost
of goods sold.
Cost of Goods Units on hand
Available for ÷ on the date of
Sale
sale
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-81
First-In,
First-In, First-Out
First-Out Method
Method (FIFO)
(FIFO)
Oldest
Oldest
Costs
Costs
Costs
Costs of
of
Goods
Goods Sold
Sold
Recent
Recent
Costs
Costs
Ending
Ending
Inventory
Inventory
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-82
Last-In,
Last-In, First-Out
First-Out Method
Method (LIFO)
(LIFO)
Recent
Recent
Costs
Costs
Costs
Costs of
of
Goods
Goods Sold
Sold
Oldest
Oldest
Costs
Costs
Ending
Ending
Inventory
Inventory
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-83
The
The Principle
Principle of
of Consistency
Consistency
Once a company has
adopted a particular
accounting method, it
should follow that
method consistently,
rather than switch
methods from one
year to the next.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-84
Just-In-Time
Just-In-Time (JIT)
(JIT) Inventory
Inventory Systems
Systems
This inventory arrived
just in time for us to use
it in the manufacturing
process.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-85
Periodic
Periodic Inventory
Inventory Systems
Systems
In a periodic inventory system, inventory entries
are as follows.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Entry on Purchase Date
Purchases
Accounts Payable
$$$$
$$$$
Note
Note that
that an
an entry
entry is
is not
not
made
made to
to inventory.
inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-86
Periodic
Periodic Inventory
Inventory Systems
Systems
In a periodic inventory system, inventory entries
are as follows.
GENERAL JOURNAL
Date
Account Titles and Explanation
Debit
Credit
Entry on Sale Date
No entry to inventory.
Accounts Receivable
Sales
McGraw-Hill/Irwin
$$$$
$$$$
© The McGraw-Hill Companies, Inc., 2005
1-87
Periodic
Periodic Inventory
Inventory Systems
Systems
The inventory on
hand and the
cost of goods
sold for the year
are not
determined until
year-end.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-88
Periodic
Periodic Inventory
Inventory Systems
Systems
We use one of these inventory valuation
methods in a periodic inventory system.
Specific
identification
Average
cost
FIFO
LIFO
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-89
For interim f
inancial
statements,
we may need
to estimate e
nding
inventory an
d cost of
goods sold.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-90
The
The Gross
Gross Profit
Profit Method
Method
nDetermine
nDetermine cost
cost of
of goods
goods
available
available for
for sale.
sale.
oEstimate
oEstimate cost
cost of
of goods
goods
sold
sold by
by multiplying
multiplying the
the net
net
sales
sales by
by the
the cost
cost ratio.
ratio.
pDeduct
pDeduct cost
cost of
of goods
goods sold
sold
from
from cost
cost of
of goods
goods
available
available for
for sale
sale to
to
determine
determine ending
ending
inventory.
inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-91
The
The Gross
Gross Profit
Profit Method
Method
In
In March
March of
of 2005,
2005, ChemCo’s
ChemCo’s inventory
inventory was
was destroyed
destroyed
by
by fire.
fire. ChemCo’s
ChemCo’s normal
normal gross
gross profit
profit ratio
ratio isis 30%
30% of
of
net
net sales.
sales. At
At the
the time
time of
of the
the fire,
fire, ChemCo
ChemCo showed
showed
the
the following
following balances:
balances:
Sales
$ 31,500
Sales returns
1,500
Beginning Inventory
12,000
Net cost of goods purchased
20,500
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-92
The
The Retail
Retail Method
Method
The
The retail
retail method
method of
of estimating
estimating inventory
inventory requires
requires
that
that management
management determine
determine the
the value
value of
of ending
ending
inventory
inventory at
at retail
retail prices.
prices.
In
In March
March of
of 2005,
2005, ChemCo’s
ChemCo’s inventory
inventory was
was destroyed
destroyed
by
by fire.
fire. At
At the
the time
time of
of the
the fire,
fire, ChemCo’s
ChemCo’s
management
management collected
collected the
the following
following information:
information:
Information for ChemCo
The Retail Method
Goods available for sale at cost
Goods available for sale at retail
Physical count of ending inventory priced at retail
McGraw-Hill/Irwin
$ 32,500
50,000
22,000
© The McGraw-Hill Companies, Inc., 2005
1-93
Financial
Financial Analysis
Analysis
Measures
Measures how
how quickly
quickly aa company
company
sells
sells its
its merchandise
merchandise inventory.
inventory.
Inventory
Turnover Rate
=
Cost of Goods Sold
Average Inventory
Average
AverageInventory
Inventory==(Beg.
(Beg.Inv.
Inv.++End.
End.Inv.)
Inv.)÷÷22
A
A ratio
ratio that
that is
is low
low compared
compared to
to competitors
competitors
suggests
suggests inefficient
inefficient use
use of
of assets.
assets.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-94
Financial
Financial Analysis
Analysis
Avg. Number
of Days to
Sell Inventory
=
Days in the Year
Inventory Turnover
Measures
Measures how
how many
many days
days on
on
average
average itit takes
takes to
to sell
sell its
its
inventory.
inventory.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Accounting
Accounting Methods
Methods Can
Can Affect
Affect
Financial
Financial Ratios
Ratios
1-95
Remember that identical
companies that use
different inventory methods
(e.g., FIFO and LIFO) will
have different inventory
turnover ratios.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-96
End
End of
of Part
Part (4)
(4)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-97
Part (5)
MANAGEMENT ACCOUNTING
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Management
Management Accounting:
Accounting:
Basic
Basic Framework
Framework
1-98
Management accounting and
assigning decision-making authority.
Accounting systems help to identify
who has authority over assets.
Accounting information supports
planning and decision-making.
Accounting reports provide a means of
monitoring, evaluating, and rewarding performance.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Management
Management Accounting
Accounting
Systems
Systems Framework
Framework
1-99
Top
Top Management
Management
Budget:
Budget:
Future
Future Plans
Plans
Assign
Assign
Decision-Making
Decision-Making
McGraw-Hill/Irwin
Actual
Actual Results:
Results:
Current
Current
Support
Support
Decision-Making
Decision-Making
Performance
Performance
Evaluation:
Evaluation: Past
Past
Evaluate
Evaluate
Decision-Making
Decision-Making
© The McGraw-Hill Companies, Inc., 2005
Comparing
Comparing Financial
Financial Accounting
Accounting and
and
Management
Management Accounting
Accounting
Purpose
Purpose
Types
Typesof
of
Reports
Reports
Standards
Standards
Reporting
Reporting
Entity
Entity
Time
Time
Periods
Periods
Users
Users
McGraw-Hill/Irwin
1-100
Financial
Management
Financial Accounting
Accounting
ManagementAccounting
Accounting
Provide
Provide
Provideinformation
informationabout
about the
the
Provideinformation
informationfor
for
financial
planning,
financialposition
positionand
and
planning, evaluating,
evaluating, and
and
performance
rewarding
performanceof
ofthe
thecompany.
company.
rewardingperformance.
performance.
Balance
Balancesheet,
sheet, income
income
statement,
statement, and
andstatement
statement of
of Various,
Various, non-standard
non-standardreports.
reports.
cash
cashflows.
flows.
GAAP
None
GAAP
None
Usually,
AA component
Usually, the
thecompany
company taken
taken
component of
ofthe
the
as
company's
as aawhole.
whole.
company's value
valuechain.
chain.
Usually
Usually aayear,
year, quarter,
quarter, or
oraa
Any
Any period.
period.
month.
month.
Investors,
Investors, creditors,
creditors, and
andother
other Management,
Management, customers,
customers, and
and
external
others
externalparties.
parties.
others ininthe
thevalue
valuechain.
chain.
© The McGraw-Hill Companies, Inc., 2005
Accounting
Accounting for
for
Manufacturing
Manufacturing Operations
Operations
1-101
The
The cost
cost to
to
produce
produce aa unit
unit of
of
product
product includes:
includes:
zzDirect
Direct material
material
zzDirect
Direct labor
labor
zzManufacturing
Manufacturing
overhead
overhead
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-102
Direct
Direct Materials
Materials
Raw materials
& component
parts that
become an
integral part
of finished
products.
Can be traced
directly and
conveniently
to products.
IfIfmaterials
materialscannot
cannotbe
betraced
traceddirectly
directlyto
toproducts,
products,
the
andare
arepart
part
thematerials
materialsare
areconsidered
considered indirect
indirectand
of
ofmanufacturing
manufacturingoverhead.
overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-103
Direct
Direct Labor
Labor
Includes
Includes the
the payroll
payroll cost
cost of
of direct
direct workers.
workers.
Direct labor
×
hours
Wage
rate
Those
Thoseemployees
employees
who
whowork
workdirectly
directly
on
onthe
thegoods
goodsbeing
being
manufactured.
manufactured.
The
Thecost
costof
ofemployees
employeeswho
whodo
donot
notwork
work
directly
directlyon
onthe
thegoods
goodsis
isconsidered
consideredindirect
indirect
labor
laborand
andis
ispart
partof
ofmanufacturing
manufacturingoverhead.
overhead.
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
1-104
Manufacturing
Manufacturing Overhead
Overhead
All
All manufacturing
manufacturing costs
costs other
other than
than direct
direct
materials
materials and
and direct
direct labor.
labor.
Includes:
Includes:
zz Indirect
Indirect materials.
materials.
zz Indirect
Indirect labor.
labor.
zz Machinery
Machinery and
and
equipment
equipment costs.
costs.
zz Cost
Cost of
of regulatory
regulatory
compliance.
compliance.
McGraw-Hill/Irwin
Does
Doesnot
notinclude
include
selling
sellingor
orgeneral
generaland
and
administrative
administrative
expenses.
expenses.
© The McGraw-Hill Companies, Inc., 2005
1-105
Flow
Flow of
of Physical
Physical
Goods
Goods in
in Production
Production
Direct
Direct
Materials
Materials
Purchased
Purchased
Direct
Direct
Materials
Materials
Used
Used
Finished
Finished
Goods
Goods
Direct
Direct
Labor
Labor
Manufacturing
Manufacturing
Overhead
Overhead
Goods
Goods
Sold
Sold
MegaLoMart
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Accounting
Accounting for
for
Manufacturing
Manufacturing Operations
Operations
1-106
Manufacturing
Manufacturing costs
costs are
are often
often
combined
combined as
as follows:
follows:
Direct
Direct
Materials
Materials
Direct
Direct
Labor
Labor
Prime
Cost
McGraw-Hill/Irwin
Manufacturing
Manufacturing
Overhead
Overhead
Conversion
Cost
© The McGraw-Hill Companies, Inc., 2005
1-107
Product
Product Costs
Costs Versus
Versus Period
Period Costs
Costs
Product Costs
(manufacturing
costs)
Period Costs
(operating
expenses and
income taxes.)
McGraw-Hill/Irwin
Balance
BalanceSheet
Sheet
as
incurred
as
incurred
Current
Currentassets
assets
and
andinventory
inventory
Income
Income
Statement
Statement
Revenue
Revenue
COGS
COGS
Gross
Grossprofit
profit
Expenses
Expenses
Net
Netincome.
income.
When
Whengoods
goods
are
aresold.
sold.
© The McGraw-Hill Companies, Inc., 2005
Inventories
Inventories of
of aa
Manufacturing
Manufacturing Business
Business
1-108
Raw
Rawmaterials
materials-- inventory
inventoryon
on
hand
handand
andavailable
availablefor
foruse.
use.
Finished
Finished
goodsgoodscompleted
completed
goods
goodsawaiting
awaiting
sale.
sale.
McGraw-Hill/Irwin
Work
Workin
in
process
process-partially
partially
completed
completed
goods.
goods.
© The McGraw-Hill Companies, Inc., 2005
1-109
Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production
Direct
materials
purchased
Direct
materials
used
Materials
Inventory
$$$
$$$
Work in Process
Inventory
$$$
$$$
Direct labor &
Manufacturing Overhead
Cost of goods
manufactured
Finished Goods
Inventory
$$$
McGraw-Hill/Irwin
$$$
Cost of
Goods Sold
$$$
© The McGraw-Hill Companies, Inc., 2005
Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production
1-110
Pure-Ice
Pure-Ice Inc.
Inc. had
had $52,000
$52,000 of
of inventory
inventory in
in
direct
direct materials
materials inventory
inventory on
on January
January 1,
1,
2005.
2005. During
During the
the year,
year, Pure-Ice
Pure-Ice
purchased
purchased $586,000
$586,000 of
of additional
additional direct
direct
materials.
materials. At
At December
December 31,
31, 2005,
2005, $78,000
$78,000
of
of the
the direct
direct materials
materials were
were still
still on
on hand.
hand.
How
How much
much direct
direct material
material was
was
placed
placed into
into production
production during
during 2005?
2005?
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005
Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production
+
=
–
=
Beginning materials
inventory
Materials purchased
Materials available to be
placed into production
Materials placed into
production
Ending materials
inventory
McGraw-Hill/Irwin
$
1-111
52,000
586,000
638,000
??
$
78,000
© The McGraw-Hill Companies, Inc., 2005
1-112
Flow
Flow of
of Costs
Costs Associated
Associated
With
With Production
Production
+
=
–
=
Beginning materials
inventory
Materials purchased
Materials available to be
placed into production
Materials placed into
production
Ending materials
inventory
McGraw-Hill/Irwin
$
52,000
586,000
638,000
!
560,000
$
78,000
© The McGraw-Hill Companies, Inc., 2005
1-113
End
End of
of Part
Part (5)
(5)
McGraw-Hill/Irwin
© The McGraw-Hill Companies, Inc., 2005