Page 250 - Accounting Principles (A Business Perspective)

6. Merchandising transactions

Cost of goods sold:
Merchandise inventory, 2010 January 1 $ 24,000
Purchases $167,000
Less: Purchase discounts $3,000
Purchase returns and allowances 8,000 11,000
Net Purchases $156,000
Add: Transportation-in 10,000
Net cost of purchases 166,000
Cost of goods available for sale $190,000
Less: Merchandise inventory, 2010 December 31 31,000
Cost of goods sold $159,000

This illustration is the same as Exhibit 36, repeated here for your convenience.
Exhibit 38: Determination of cost of goods sold for Hanlon Retain Food Store*
In Exhibit 38, Hanlon's beginning inventory (USD 24,000) plus net cost of purchases (USD 166,000) is equal to
cost of goods available for sale (USD 190,000). The firm deducts the ending inventory cost (USD 31,000) from
cost of goods available for sale to arrive at cost of goods sold (USD 159,000).
Another way of looking at this relationship is the following diagram:

Beginning inventory and net cost of purchases combine to form cost of goods available for sale. Hanlon divides
the cost of goods available for sale into ending inventory (which is the cost of goods not sold) and cost of goods sold.
To continue the calculation appearing in Exhibit 38, net cost of purchases (USD 166,000) is equal to purchases
(USD 167,000), less purchase discounts (USD 3,000) and purchase returns and allowances (USD 8,000), plus
transportation-in (USD 10,000).

As shown in Exhibit 38, ending inventory cost (merchandise inventory) appears in the income statement as a
deduction from cost of goods available for sale to compute cost of goods sold. Ending inventory cost (merchandise
inventory) is also a current asset in the end-of-period balance sheet.
Companies use periodic inventory procedure because of its simplicity and relatively low cost. However, periodic
inventory procedure provides little control over inventory. Firms assume any items not included in the physical
count of inventory at the end of the period have been sold. Thus, they mistakenly assume items that have been
stolen have been sold and include their cost in cost of goods sold.

To illustrate, suppose that the cost of goods available for sale was USD 200,000 and ending inventory was USD
60,000. These figures suggest that the cost of goods sold was USD 140,000. Now suppose that USD 2,000 of goods

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