CENTURY 21 ACCOUNTING © Thomson/South-Western

LESSON 4-2LESSON 4-2

Interim Departmental Statement of Gross Profit

Modified by D. Burns West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western

INTERIM FINANCIAL STATEMENTSINTERIM FINANCIAL STATEMENTS

Departmental businesses prepare the same financial statements in the same form as a non-departmentalized business.Departmental businesses usually prepare

reports about the performance of each department

Interim mean between terms or in the meantime (between fiscal ending periods)

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

GROSS PROFITGROSS PROFIT

The amount of revenue from sales less the cost of goods sold is called gross profitGross Profit shows the direct relationship

between sales and sales price & merchandise inventory & the cost of merchandise inventory

By analyzing gross profit managers can determine the amount of revenue remaining after the cost of merchandise has been deducted from net sales

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

DEPARTMENTAL STATEMENT OF DEPARTMENTAL STATEMENT OF GROSS PROFITGROSS PROFIT

A statement showing gross profit for each department is called a departmental statement of gross profit

A review of the information may show a need to do the following: Change merchandise selling pricesChange suppliers of merchandiseAdd, delete, or change productsDiscontinue a department

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

DEPARTMENTAL STATEMENT OF DEPARTMENTAL STATEMENT OF GROSS PROFITGROSS PROFIT

Gross profit information reflects changes between costs & selling prices

Departmental gross profit data also provide information that can be used to quickly determine potential profits

Creating interim financial statements gives business the chance to check their progress, or lack of, in shorter time periods than 1 year.

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

DETERMINING ENDING DETERMINING ENDING MERCHANDISE INVENTORYMERCHANDISE INVENTORY

To prepare interim departmental statements of gross profit, both beginning & ending inventory amounts are neededThe ending inventory for one month

becomes the beginning inventory for the next month

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

DETERMINING MERCHANDISE ON DETERMINING MERCHANDISE ON HANDHAND

Two principal methods are used to determine actual amount of merchandise on handA merchandise inventory determined by

counting, weighting, or measuring items of merchandise on hand is called a periodic inventory(physical inventory)

A merchandise inventory determined by keeping a continuous record of increases, decreases, & balance on hand is called a perpetual inventory

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

DETERMINING MERCHANDISE ON DETERMINING MERCHANDISE ON HANDHAND

Point of sale terminals/cash registers and barcodes have made perpetual inventories increasingly common.

When a periodic inventory is not practical, a business may estimate merchandise inventory

Modified by D. Burns West Johnston High School

page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western

GROSS PROFIT METHOD OF ESTIMATING GROSS PROFIT METHOD OF ESTIMATING INVENTORYINVENTORY

Estimating inventory by using the previous year’s percentage of gross profit on operations is called the gross profit method of estimating an inventory Assumes a continuous relationship between gross profit &

net sales Based on experience in previous fiscal periods, a gross

profit to net sales percentage is calculated

An ending merchandise inventory amount calculated using the gross profit method is an estimate & is not absolutely accurate Sufficient for monthly interim financial statements

9

LESSON 6-3

page 182

CENTURY 21 ACCOUNTING © Thomson/South-Western

ESTIMATING ENDING ESTIMATING ENDING MERCHANDISE INVENTORYMERCHANDISE INVENTORY

Obtain the beginning inventory, January 1, from the general ledger. The balance of Merchandise Inventory – Audio $186,434.61, is the actual merchandise inventory on hand at the beginning of the fiscal year. The amount is the result of the periodic inventory count from December 31 of the previous year.

Modified by D. Burns West Johnston High School

page 94

CENTURY 21 ACCOUNTING © Thomson/South-Western Modified by D. Burns West Johnston High School

1. List beginning inventory.

2. Determine net purchases.

3. Calculate merchandise for sale.

4. Determine net sales.

5. Calculate estimated gross profit.

6. Calculate the estimated cost of merchandise sold.

7. Calculate estimated ending inventory.

ESTIMATING ENDING ESTIMATING ENDING MERCHANDISE INVENTORYMERCHANDISE INVENTORY page 94

11

2233

77

6655

44

CENTURY 21 ACCOUNTING © Thomson/South-Western

RETAIL METHOD OF ESTIMATING RETAIL METHOD OF ESTIMATING INVENTORYINVENTORY

Estimating inventory by using a percentage based on both cost & retail prices is called the retail method of estimating inventory May be used instead of the gross profit method

The business must keep separate records of both cost & retail prices for net purchases, net sales, & beginning merchandise inventory

12

LESSON 6-3

CENTURY 21 ACCOUNTING © Thomson/South-Western

13

LESSON 6-3

1. Enter beginning inventory at cost and retail.

2. Add net purchases at cost and retail. 6. Determine estimated ending

inventory cost.

5. Calculate estimated ending inventory at retail.

4. Write net sales.

3. Calculate merchandise available for sale at cost and retail.

RETAIL METHOD OF ESTIMATING RETAIL METHOD OF ESTIMATING INVENTORYINVENTORY page 183

66

33

11

22

55

44

CENTURY 21 ACCOUNTING © Thomson/South-Western

INTERIM DEPARTMENTAL INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFITSTATEMENT OF GROSS PROFIT

An Interim Departmental Statement of Gross Profit is organized into three sectionsOperating RevenueCost of merchandise soldGross profit on operations

Modified by D. Burns West Johnston High School

page 95

CENTURY 21 ACCOUNTING © Thomson/South-Western Modified by D. Burns West Johnston High School

INTERIM DEPARTMENTAL INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFITSTATEMENT OF GROSS PROFIT page 95

CENTURY 21 ACCOUNTING © Thomson/South-Western Modified by D. Burns West Johnston High School

1. The cost of merchandise sold percentage:

2. The gross profit margin percentage:

.6076 or 60.8%=$42,186.47

$69,429.95

.3924 or 39.2%=$27,243.48

$69,429.95

COST OF MERCHANDISE SOLD AND COST OF MERCHANDISE SOLD AND GROSS PROFIT PERCENTAGESGROSS PROFIT PERCENTAGES page 96

11

22

The percentage relationship between one financial statement item & the total that includes that item is called a component percentage

CENTURY 21 ACCOUNTING © Thomson/South-Western

DETERMINING ACCEPTABLE LEVELS OF DETERMINING ACCEPTABLE LEVELS OF PERFORMANCEPERFORMANCE

Modified by D. Burns West Johnston High School

For component percentages to be useful, a business must know acceptable levels of performance

May use historical records or industry performance standards to compare current percentages to acceptable percentages

CENTURY 21 ACCOUNTING © Thomson/South-Western Modified by D. Burns West Johnston High School

TERMS REVIEWTERMS REVIEW

gross profit departmental statement of gross profit periodic inventory perpetual inventory gross profit method of estimating an inventory component percentage

page 97