Chapter 1, Problem 5PSA

To determine

Concept introduction:

Cost of goods sold:

Cost of goods sold is the costs incurred for manufacturing or acquiring the products sold by a company in a given year. It includes all the direct costs incurred for the products sold. It can be calculated using the following formulas:

$Costofgoodssold=Beginningmerchandiseinventory+Costofpurchases-Endingmerchandiseinventory$

$Costofgoodssoldforfinishedgoods=Beginningfinishedgoodsinventory+Costofgoodsmanufactured-Endingfinishedgoodsinventory$

Requirement 1:

To calculate:

Cost of goods sold section of partial income statement at December 31, 2015 for both the companies.

Answer to Problem 5PSA

Cost of goods sold as at December 31, 2015:

For Music World Retail = $3, 25,000

For Wave- Board Manufacturing = $11, 50,000

Explanation of Solution

To calculate cost of goods sold for Music World Retail, following formula would be used:

$Costofgoodssold=Beginningmerchandiseinventory+Costofpurchases-Endingmerchandiseinventory$

In the given problem, following information is given:

Beginning merchandise inventory = $2, 00,000

Cost of purchases = $3, 00,000

Ending merchandise inventory = $1, 75,000

Therefore, Cost of goods sold for Music world Retail would be:

$Costofgoodssold=\$2,00,000+\$3,00,000-\$1,75,000=\$3,25,000$

Further for calculation of cost of goods sold for Wave- Board Manufacturing, below- mentioned formula would be used:

$Costofgoodssoldforfinishedgoods=Beginningfinishedgoodsinventory+Costofgoodsmanufactured-Endingfinishedgoodsinventory$

Following information is given in the given problem:

Beginning finished goods inventory = $5, 00,000

Cost of goods manufactured = $8, 75,000

Ending finished goods inventory = $2, 25,000

$Thus,costofgoodssold=\$5,00,000+\$8,75000-\$2,25,000=\$11,50,000$

Cost of goods sold section of the Income statement at December 31, 2015 for both the companies as asked in the given problem is tabulated below:

Schedule of cost of goods sold for both the companies (Amount in $):

Particulars	Music World Retail	Wave- Board Manufacturing
Beginning inventory	2,00,000	5,00,000
Add: Cost of purchases/ Cost of goods manufactured	3,00.000	8,75,000
Goods available for sale	5,00,000	13,75,000
Less: Ending inventory	(1,75,000)	(2,25,000)
Cost of goods sold	3,25,000	11,50,000

Thus, Cost of goods sold for Music World Retail is coming out to be $3, 25,000 and that of Wave- Board Manufacturing as $11, 50,000.

To determine

Concept introduction:

Cost of goods sold:

Cost of goods sold is the costs incurred for manufacturing or acquiring the products sold by a company in a given year. It includes all the direct costs incurred for the products sold.

Requirement 2:

Memorandum to instructor (a) identifying inventory accounts and (b) describing where each item is reported on income statement and balance sheet of both the companies.

Answer to Problem 5PSA

1. Beginning inventory is shown in the Income Statement
2. Cost of purchases or cost of goods manufactured is charged to Income Statement. Further, the ending Accounts Payables are listed as Liabilities in the Balance Sheet.
3. Ending inventory is shown at credit side as Income in the Income statement and as Current Asset in the Balance Sheet.

Explanation of Solution

Memorandum to instructor To: Instructor

Subject: Memorandum identifying inventory accounts and describing where each item is reported

Details:

All the account heads are listed below:

Beginning inventory is shown in the Income Statement

Cost of purchases or cost of goods manufactured is charged to Income Statement. Further, the ending Accounts Payables are listed as Liabilities in the Balance Sheet.

When the goods are purchased or manufactured, following entry would be passed in the accounting books:

Date	Particulars	L.F.	Debit Amount (in $)	Credit Amount (in $)
	Cost of purchases		XXX
	Account Payable			XXX
	(Being goods purchased or manufactured)

Ending inventory is shown at credit side as Income in the Income statement and as Current Asset in the Balance Sheet.