![]() What information is included in these schedules, and what do they look like for Custom Furniture Company?Īnswer: Figure 1.7 "Income Statement Schedules for Custom Furniture Company" shows these three schedules for Custom Furniture Company for the month of May. Question: The basic cost flow equation can be used in three supporting schedules to help us determine the cost of goods sold amount on the income statement for manufacturing companies. Schedule of raw materials placed in production.We describe how to calculate these amounts using three formal schedules in the following order: Cost of goods sold represents the cost of goods that are sold and transferred out of finished goods inventory into cost of goods sold.Īccountants need all these amounts-raw materials placed in production, cost of goods manufactured, and cost of goods sold-to prepare an income statement for a manufacturing company. Cost of goods manufactured represents the cost of goods completed and transferred out of work-in-process (WIP) inventory into finished goods inventory. Raw materials used in production shows the cost of direct and indirect materials placed into the production process. We will apply this equation to the three inventory asset accounts discussed earlier (raw materials, work in process, and finished goods) to calculate the cost of raw materials used in production, cost of goods manufactured, and cost of goods sold. Key Equation Beginning balance (BB) + Transfers in (TI) – Ending balance (EB) = Transfers out (TO) Understanding income statements in a manufacturing setting begins with the inventory cost flow equation. Since income statements for manufacturing companies tend to be more complex than for service or merchandising companies, we devote this section to income statements for manufacturing companies. Why are accounting systems more complex for manufacturing companies?Īnswer: Accounting systems are more complex for manufacturing companies because they need a system that tracks manufacturing costs throughout the production process to the point at which goods are sold. Such companies require an accounting system that goes well beyond accounting solely for the purchase and sale of goods. Manufacturing companies, such as Johnson & Johnson and Honda Motor Company, produce and sell goods. Since merchandising companies must account for the purchase and sale of goods, their accounting systems are more complex than those of service companies. Merchandising companies (also called retail companies) like Macy’s and Home Depot buy and sell goods but typically do not manufacture goods. The accounting process and income statement for service companies are relatively simple. Question: Companies that provide services, such as Ernst & Young (accounting) and Accenture LLP (consulting), do not sell goods and therefore have no inventory. Describe how to prepare an income statement for a manufacturing company.Rather, it is calculated using a lump sum at the end of the interval when the count is conducted. ![]() COGS Accounting: There are no continual entries under the COGS account associated with periodic inventory systems.Periodic systems require physical counts and can often be cumbersome, especially if there are any recounts that need to be done. That's because everything is done electronically. Effort: Companies aren't required to put in too much effort with perpetual systems once the software and related infrastructure are installed.Assuming there is no chance of theft or damage to a company's inventory, perpetual systems are often Margin of Error: There is a greater chance of error with periodic systems because the counts are done manually.Periodic systems, though, require manual recording. Recording Methods: Perpetual systems use computers and software that automatically update a company's ledgers with information about products that are sold and the remaining inventory.As such, they use occasional physical counts to measure their inventory and the cost of goods sold (COGS). The periodic inventory system is often used by smaller businesses that have easy-to-manage inventory and may not have a lot of money or the opportunity to implement computerized systems into their workflow. There is a greater margin of error with the periodic system as opposed to the perpetual system because it relies on a physical count.Businesses with larger inventories, high sales volumes, and multiple retail outlets need perpetual inventory systems.Periodic inventory accounting systems are better suited to small businesses that have easy-to-manage inventories or those with low sales volumes.The perpetual system keeps track of inventory balances continuously, with updates made automatically whenever a product is received or sold.The periodic inventory system uses an occasional physical count to measure the level of inventory and the cost of goods sold.
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