CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 4-2 Interim Departmental Statement of Gross Profit Modified by D. Burns West Johnston High School.

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CENTURY 21 ACCOUNTING © Thomson/South-Western LESSON 4-2 Interim Departmental Statement of Gross Profit Modified by D. Burns West Johnston High School

CENTURY 21 ACCOUNTING © Thomson/South-Western INTERIM 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 PROFIT The amount of revenue from sales less the cost of goods sold is called gross profit Gross 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 GROSS 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 prices Change suppliers of merchandise Add, delete, or change products Discontinue a department Modified by D. Burns West Johnston High School page 93

CENTURY 21 ACCOUNTING © Thomson/South-Western DEPARTMENTAL STATEMENT OF GROSS 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 MERCHANDISE INVENTORY To prepare interim departmental statements of gross profit, both beginning & ending inventory amounts are needed The 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 HAND Two principal methods are used to determine actual amount of merchandise on hand A 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 HAND 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 INVENTORY 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 MERCHANDISE 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-WesternModified 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 MERCHANDISE INVENTORY page

CENTURY 21 ACCOUNTING © Thomson/South-Western RETAIL METHOD OF ESTIMATING INVENTORY 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 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 INVENTORY page

CENTURY 21 ACCOUNTING © Thomson/South-Western INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFIT An Interim Departmental Statement of Gross Profit is organized into three sections Operating Revenue Cost of merchandise sold Gross profit on operations Modified by D. Burns West Johnston High School page 95

CENTURY 21 ACCOUNTING © Thomson/South-WesternModified by D. Burns West Johnston High School INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFIT page 95

CENTURY 21 ACCOUNTING © Thomson/South-WesternModified 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, $69, or 39.2% = $27, $69, COST OF MERCHANDISE SOLD AND GROSS PROFIT PERCENTAGES page  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 PERFORMANCE 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-WesternModified by D. Burns West Johnston High School TERMS REVIEW gross profit departmental statement of gross profit periodic inventory perpetual inventory gross profit method of estimating an inventory component percentage page 97