Lesson: 38

Topic: Cost of Goods Sold

Objective:

The primary focus of this topic is the cost of goods sold section of the Income Statement. However, we shall examine the factors that affect the sales revenue section as well. Students will come to appreciate the fact that cost of goods sold is an expense that is unique to merchandising businesses. In addition, students will come to understand that some businesses (namely, those using a periodic accounting system) must calculate their cost of goods sold at the end of the accounting period, as they lack the ability to maintain a cost of goods sold account.

Finally, students will come to understand how periodic inventory systems determine their cost of goods sold via a calculation involving the following accounts:

• Beginning and ending "Inventory" (aka "Merchandise" or "Merchandise Inventory"), and
• "Purchases" (aka "Purchases of Merchandise for Resale").

Method of Instruction and Evaluation Exercise:

Students will view a Power Point Presentation, featuring Homer Simpson, which examines the topic of calculating the Cost of Goods Sold.

After a brief discussion of the presentation, students will use a computer spreadsheet (i.e. Microsoft Excel) to complete a series of partial Income Statements which focus on the basic elements of Cost of Goods Sold section. An example of this task is presented below:

The assigned problem for the class will be exercise #3 on page 429 in your text.

Expectations Addressed:

The "Advanced Accounting Practices" strand of the BAF3M Ministry of Education Curriculum Guidelines outlines all of the following specific expectations. The expectations addressed by this lesson have been highlighted below.

• The Accounting Cycle for a Merchandising Business:
  • describe the principal accounting elements particular to a merchandising business (e.g., new accounts, cost of goods sold section, returns, discounts);
  • identify and describe the periodic and perpetual inventory systems and journalize transactions using both systems;
  • assess the effects that transactions have on the accounts and financial statements of a merchandising business;
  • record transactions in the journals and ledgers of a merchandising business;
  • prepare a trial balance and the financial statements, including a detailed cost of goods sold section, for a merchandising business;
  • record the adjusting and closing entries for a merchandising business (e.g., accruals, inventory adjustment);
  • describe the impact of year-end procedures, including adjusting and closing entries, on the financial statements of a merchandising business;
  • describe alternative accounting practices (e.g., special journals and ledgers).
• Accounting for Sales Tax:
  • describe the accounting practices particular to sales tax (e.g., accounts required, financial statement presentation);
  • record transactions related to provincial sales tax (e.g., collections, remittance);
  • record transactions related to federal sales tax (e.g., collections, remittance).
• Computer Applications in Accounting:
  • use accounting or application software to record transactions for a service business;
  • use accounting or application software to record transactions for a merchandising business;
  • use accounting or application software to prepare financial statements.

References:

• text, chapter #11, pages 423 - 428
• Power Point Presentation: Calculating the Cost of Goods Sold

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