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Income Statement Transactions (When selling inventory: (Debit Accounts…
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Inventory
Memorize:
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To calculate Net Profit % remember to subtract Contra revenue, cost of goods sold, and income tax then divide by net sales
Beginning Inventory + Purchases - Ending Inventory = cost of goods sold (i.e. how much inventory was sold)
Remember to always the cost of the good, not the selling price
Set up a table for solving: FIFO. LIFO. AVERAGE
BI (# units price)
+P (# units price)
Goods available for sale
-cost of goods sold (# units * price)
EI
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Profit, taxes, and EI are all correlated for any inventory valuation
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Inventory Valuation
LIFO
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Good in inflationary environments because cost of goods sold goes up, decreasing net income and income taxes
AVERAGE Cost
How to determine cost of goods sold:
- Take total value of goods available for sale (BI + P) / Total Units = Average Cost.
- Average Cost Number of units sold = cost of goods sold
FIFO
Good in deflationary environments because cost of goods sold is higher, decreasing net income and income taxes.
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How to Account for buying raw materials:
- Credit cash
- Debit raw materials
- Add capitalization costs to RM, transfer to inventory, and expense the capitalization costs
Includes manufacturing, freight, invoice, other capitalization costs