I.

Techniques for estimating the cost of goods sold and the ending inventory
a. Useful for companies that use periodic inventory systems to prepare monthly or
quarterly financial statements
b. To estimate losses in fire, theft, etc.
II. Gross profit method
a. Based on the assumption that the rate of gross profit remains approximately the
same from period to period and therefore the ratio of cost of goods sold to net
sales is relatively constant from period to period (note 2 parts of the explanation)
b. GP method is called as such because COGS is computed thru use of GP rate
i. If GP is based on sales: net sales x cost ratio
ii. If GP is based on cost: net sales / sales ratio
c. Note: GP rate is ratio of GP to Net sales
i. 1 GP rate = cost ratio
d. Remember: CGAS COGS = EI
i. CGAS: BI + Purchases + freight in purchase return, allowance, discount
e. ex. Based on sales (1)
f. ex. Based on cost (2)
III. Retail method
a. IAS 22: this method is often used in the retail industry for measuring inventory of
large number of rapidly changing items with similar margin for which it is
impracticable to use other costing method
i. i.e. department stores, supermarkets, etc. WIDE variety of goods
ii. retail = just means selling price
b. information required
i. BI @ cost and retail price
ii. Purchases during the period @ cost and retail price
iii. Adjustments to the original retail price (i.e. additional markup, markup
cancellation, markdown, markdown cancellation)
iv. Other adjustments (departmental transfer, breakage, shrinkage, theft,
damaged goods, employee discount
c. Procedure
i. Very similar to GP method but EI is stated at retail price instead of @ cost
ii. (4)
iii. how do we treat the different items?: look at iPad!
iv. Three approaches (demonstrate: look at iPad!)
1. Conservative approach
a. Only include markups and markup cancellations in
computing for the cost ratio
2. Average cost approach
a. Also include markdown and markdown cancellations in
computing for the cost ratio
3. FIFO approach (like average but dont include the BI in computing
the cost ratio)
I. PPE
a. Definition: Tangible assets that are held for use in the production or supply of
goods or services, for rental to others, or for administrative purposes; and are
expected to be used for more than one time period (break down the definition)
i. i.e. land, building, machinery, equipment
b. Accountable events in the lives of PPE
i. Acquisition
ii. Depreciation: allocation of the cost to expense over assets useful life
iii. Sale or disposal
II. Measurement at acquisition
i. Measured @ cost:
1. Cost includes all expenditures that are reasonable and necessary
for getting the asset to the desired location and ready for use in the
manner intended by management
2. All the incidental charges necessary to put the asset in use
a. i.e. sales tax, delivery costs, installation costs, insurance,
import taxes
b. expense to fix it because it dropped while installing it:
expense, not part of cost of asset
c. how about the interest expense you incurred through the
N/P you used to pay for your asset? It depends! (borrowing
costs = different topic)
III. Special considerations: acquisition methods (selected only)
a. Cash basis: cash price equivalent (cash paid + directly attributable costs)
i. i.e. transpo, installation, cost of trial runs
b. acquisition on account: invoice price discount (ALWAYS regardless of whether
discount is taken or not)- check ipad!! Explain 2/10 n/30 etc.
c. acquisition on installment basis: cash price equivalent
i. i.e. if installment amount > cash price equivalent = excess is amortized as
interest
d. Donation:
i. Record as part of capital (donated capital)
1. Expenses incurred in connection with the donation: part of donated
capital account (dr. expense)
2. Expenses that are directly attributable: dr. asset cr. Donated capital
e. Construction
i. Direct cost of materials, labor
ii. Indirect cost and overhead assignable to construction
IV. Special considerations
a. Land: additional costs include: commissions to real estate brokers, escrow fees,
legal fees for examining and insuring the title, delinquent taxes paid by the
purchaser, and surveying, draining, clearing, grading fees.
i. Old building in land that is no longer useful: cost of building add to land!
b. Land improvements: driveways, fences, parking lots, landscaping, etc.
i. If land has an unlimited life, LI have limited lives (depreciate them!)
ii. Debit in a separate account
 c. Buildings
i. Purchase price or the cost to build the building (materials, labor, interest,
etc.)
ii. Major repairs that prolong the useful life of the building: add to asset
iii. Regular repairs that are part of the regular maintenance of the building (to
keep it running): expense
d. Equipment:
i. Sales tax, delivery costs, costs of getting equipment in order, preparing
site of machine: add to asset
ii. Maintenance costs: expense
e. Allocation of lump-sum purchase
i. Allocation of lump-sum price is necessary!
ii. Usually a % of allocation is given
iii. If FV is given, allocate based on FV ratio
iv. If only one FV is given, assign a cost = to the FV of the asset with the
available FV
V. Capital vs revenue expenditures
a. For the purchase/expansion of PPE: Capital
i. Record in asset accounts (Capitalize!)
b. For ordinary repairs, maintenance, fuel, other items necessary to the ownership
and use of PPE: revenue
i. Record in expense accounts
ii. Rule of thumb: if it wont increase the useful life of asset: expense (match
with proper revenue)
c. Remember to consider materiality!
i. Any material expenditure that will benefit several accounting periods:
capital expenditure
ii. Will benefit only the current period/not material in amount: revenue
expenditure
VI. Measurement after acquisition
a. SFP: BV (cost acc. dep.)
b. You can choose to measure using cost model or revaluation model
c. COST
i. BV = Cost acc. dep. acc. impairment loss
ii. BV represents the amount that remains to be allocated to expense
d. REVALUATION
i. BV is the revalued amount (FV at date of reval) subsequent acc. dep
subsequent acc. impairment loss
ii. When you increase an asset thru reval, the increase is recorded in OCI in
equity