MODULE 7: INTRODUCTION TO MANUFACTURING

OPERATIONS
(New Account Titles; The Financial Statements)
Types of Business - Sells a particular or a group of products. These
products will be sold either wholesale or retail
1. Services in the same form that they were bought.
- Sells knowledge or expertise 3. Manufacturing
2. Merchandising or Trading - Produces the goods that merchandisers sell.
These entities convert raw materials into
finished products through the utilization of
skilled labor and machines.
Comparison of Income Statements

Operating Cycle of a Merchandising Business

Source Documents
- To help identify the transactions that should be Account Titles (Buying Activities)
recorded in the books.
1. Purchases
- Contains vital information about the nature and 2. Purchase Returns and Allowances
amount of the transactions. 3. Purchase Discounts
4. Transportation In (Freight In)
Common Examples:
Account Titles (Selling Activities)
1. Purchase Requisition
1. Sales
2. Purchase Order 2. Sales Returns and Allowances
3. Invoice (Sales or Purchase) 3. Sales Discounts
4. Transportation Out (Freight Out)
4. Bill of Lading
Terms of Transactions (1)
5. Receiving Report
Credit Terms
6. Statement of Account
1. Cash Discounts
7. Check
- Discounts for prompt payment
8. Official Receipt
- If trade discounts is also offered, cash discount is
9. Deposit Slips computed on the net amount after the trade
10. Credit Memorandum discounts.
- Designated by such notation as “2/10”. stock cards. Hence, this system is used for high
in volume; low in prices inventories.
- Discount period: the period covered by the discount
- Perpetual: Uses the Account Titles:
2. Trade Discounts
Merchandise Inventory (in lieu of Purchases &
- Encourage the buyers to purchase products because its related contra & adjunct accounts) & Cost of
of markdowns from the list price. Sales. This system used the stock cards to
- There is no trade discount account and there is no account for cost & inventory. Hence, this
special accounting for this discount. system is used for low In volume; high in prices
inventories.
- Entries should be based on the invoice price which is
obtained by subtracting the trade discount from the Accounting for Value-Added Tax (VAT)
list price.
- Business are levied to pay VAT out from selling
Terms of Transactions (2) of goods/services to its customers/clients equal
to 12% of their sales.
Shipping Terms (Transportation Costs)
- With this, businesses pass on the burden of VAT
1. FOB shipping point
to their customers/clients as an add-on to its
- Buyer shoulders the shipping costs selling price.

- Ownership over goods passes from seller to the - To Account for VAT, the Account Titles to be
buyer when the inventory leaves the seller’s used are:
place of business – the shipping point.
Input Tax (VAT on Purchases & its related contra
2. FOB destination & adjunct accounts )

- Seller bears the shipping costs Output Tax (VAT on Sales & its related contra
accounts)
- Title passes only when the goods are received
by the buyer at the point of destination. VAT Payable (the excess of Output over Input
Tax)
3. Freight prepaid
Inventory Valuation & Estimation
- The seller pays the transportation costs before
shipping the goods sold - First-in, First-out (FIFO) & Weighted-average
(WA) methods
4. Freight collect
- The most common method of inventory
- The freight company collects from buyer.
valuation to follow the cost flow assumptions
Inventory Systems from purchases to cost of goods sold.

- to account for inventories & cost of sales - FIFO: assumes that the units sold from the
earliest acquisition so that the unsold units
- Two types: Periodic & Perpetual must have come from the latest acquisition.
- Periodic: Uses the Account Titles: Purchases & - WA: assumes that the units on hand and units
its related contra & adjunct accounts; doesn’t sold must have come from the beginning
have account title for Cost of Sales but it is to be inventory, then combined with what has been
computed; Inventory account will just show the purchased during the period.
beginning and ending balances. Doesn’t use the

Illustration: Compute the Total Inventory on Nov. 30 & the Cost of Sales-

Inventory, Jan. 1 1,000 units @P10.00

Purchases, Feb. 3 3,500 units @P11.50

Sold, March 18 1,300 units @P18.00

Purchases, July 13 2,000 units @P11.75

Purchases, Aug. 3 1,100 units @P10.00

Sold, Nov. 30 5,500 units @P17.00