Q27PGA - Horngren'S Financial And Managerial Accounting

Question

Question: Calculating cost of goods sold for merchandising and manufacturing companies 

Below are data for two companies: 

 Company A Company B 

Beginning balances: 

Merchandise Inventory \( 10,600 

Finished Goods Inventory \) 15,000 

Ending balances: 

Merchandise Inventory 13,100 

Finished Goods Inventory 11,700 

Net Purchases 154,500 

Cost of Goods Manufactured 214,500 

Requirements 

1. Define the three business types: service, merchandising, and manufacturing. 

2. Based on the data given for the two companies, determine the business type of each one. 

3. Calculate the cost of goods sold for each company

Step-by-Step Solution

Answer

The service company sells services, the merchandising company sell purchased from others and the manufacturing company sells the goods produced by themselves. Company A is a merchandising company and Company B is a manufacturing company. The COGS of Company A is $152,000 and company B is $217,800.

Step-by-Step Solution Step 1: Definition of a service company, merchandising company, and manufacturing company

Service companies are defined as the company which sell their time, skills, and knowledge to the customers and clients of the company

A merchandising company is defined as acompany that resells products they buy from the suppliers. Merchandisers keep the inventory of products.

A manufacturing company is a company that uses labor, equipment, supplies, and facilities to convert raw materials into finished goods and sell them.

Step 2: Determining the business type

Company A is a merchandising company as its particulars include the data for merchandising inventory

Company B is a manufacturing company as its particulars include the data for ending and beginning balance of finished goods inventory and cost of goods manufactured.

Step 3: Computation of cost goods sold

$$\begin{gathered} \mathbf{CostofgoodssoldofCompanyA}\mathbf{=}\mathbf{BeginningmerchandiseInventory}\mathbf{+}\mathbf{Purchases}\mathbf{-}\mathbf{EndingMerchandisingInventory} \\ \mathbf{=}\mathbf{10}\mathbf{,}\mathbf{600}\mathbf{+}\mathbf{154}\mathbf{,}\mathbf{500}\mathbf{-}\mathbf{13}\mathbf{,}\mathbf{100} \\ \mathbf{=}\mathbf{\$}\mathbf{152}\mathbf{,}\mathbf{000} \end{gathered}$$

$$\begin{gathered} \mathbf{CostofgoodssoldofCompanyB}\mathbf{=}\mathbf{BeginningFinishedGoodsInventory}\mathbf{+}\mathbf{COGM}\mathbf{-}\mathbf{EndingFinishedGoodsInventory} \\ \mathbf{=}\mathbf{15}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{214}\mathbf{,}\mathbf{500}\mathbf{-}\mathbf{11}\mathbf{,}\mathbf{700} \\ \mathbf{=}\mathbf{\$}\mathbf{217}\mathbf{,}\mathbf{800} \end{gathered}$$