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UT Knoxville ACCT 200 - Final Exam Study Guide
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ACCT 200 1st Edition Exam 3 Study Guide Lectures 19 27 Chapter 4 Accounting for Merchandising Businesses A merchandiser is both a buyer and a seller of goods When a merchandiser is a buyer they purchase goods from manufacturers When this happens the cost of the merchandise that is purchased is recorded on the balance sheet as the current asset Inventory When a merchandiser is a seller they sell goods to customers When this happens the cost of merchandise sold is removed from Inventory on the balance sheet and is recorded on the income statement as Cost of Goods Sold Expense matching it with the revenue from the sale The costs of running the business or the support functions for buying and selling are recorded as Selling Expense and Administrative Expense on the income statement Income and expenses that are not related to buying and selling merchandise are recorded as Other Income or Other Expense on the income statement Merchandising companies will often use a multi step income statement which is an expanded version to tell a more detailed story about the revenue and expenses A multi step income statement looks as follows Merchandising Company Income Statement Multi Step For the year ended 12 31 12 Revenue Sales Sales Returns and Allowances Sales Discounts Net Sales Expenses Cost of Merchandise Sold Expense Gross Profit Operating Expenses Selling Expenses Administrative Expenses Income from Operations Other income Other expense Net Income In the multi step income 1 sales are the revenue from selling goods 2 sales returns and allowances are the sales that have gone bad 3 sale discounts are discounts given to encourage early payment of a receivable fast payment 4 net sales are the sales that are really truly sales that actually happened 5 cost of merchandise sold expense is the cost of selling the merchandise and is the 1 expense of all merchandisers and manufacturers 6 gross profit is the profit on the sales of goods 7 selling expenses are the cost of the store for getting goods sold advertising sales people delivery etc 8 administrative expenses are the cost of office supplies utilities employee wages salaries etc 9 income from operations is the profit from buying good selling goods and running the store office 10 other income is other revenue such as rent income and interest income while other expense are expenses such as interest expense and tax expense 11 net income is the amount of the company s total earnings after all the deductions are taken out Merchandiser Returns and Allowances can happen when the merchandiser is either a seller or a buyer When a merchandiser is a seller it is called Sales Returns and Allowances These are price reductions given by merchandisers to customers when customers return goods Sales Returns and Allowances reduce the seller s Sales Revenue for the period When a merchandiser is a buyer it is called Purchase Returns and Allowances which is the cost reduction taken by the merchandisers when they purchase goods from manufacturers and then return them Purchase Returns and Allowances reduce the buyer s cost of inventory Merchandiser Discounts can also happen when the merchandiser is either r seller or buyer When a merchandiser is a seller it is called Sales Discounts These are incentive discounts when there are price reductions given by the merchandiser when they sell good to customers to encourage customers to pay quickly Sales Discounts reduce the seller s Sales Revenue for the period When a merchandiser is a buyer it is called Purchase Discount where there are cost reductions taken by merchandisers when they buy good from manufacturers and then pay quickly Purchase Discounts reduce the buyer s cost of inventory Typical discount terms 1 2 10 net 30 a 2 discount is offered if payment is made within 10 days otherwise full payment is due within 30 days 2 n 30 or net 30 no discount is offered full payment is due within 30 days 3 n eom no discount is offered full payment is due at the end of the month When merchandising businesses purchase items from manufacturers the two businesses must determine who owns the goods during transit and who is responsible for shipping costs so they must negotiate a sale contract with a legal term of purchase present FOB Shipping Point means that the buyer owns the good during transit from the moment goods leave the seller s dock and must also pay the shipping costs which increase the buyer s cost of inventory current asset on the Balance Sheet FOB Destination means that the seller owns the goods during transit til the moment the goods reach the buyer s dock and must also pay the shipping costs which increases the seller s Transportation Out a selling expense on the income statement Gross Profit measures how much of each dollar in a sales transaction is profit to the seller before other expenses The equation is gross profit gross profit net sales Gross profit net sales cost of merchandise sold Chapter 10 Accounting for Manufacturers Manufacturers are both buyers and sellers of goods just like merchandisers They buy elements to make goods DM DL and FOH and sell them to customers They report Raw Materials Work in Progress Inventory and Finished Goods Inventory on the balance sheet cost until goods are sold They also report the Cost of Goods Sold expense on the income statement when goods are sold Manufacturing costs can be product costs or period costs Product costs are capitalized as an Asset Inventory on the balance sheet Product costs include direct materials cost direct labor cost and factory overhead cost The sum of these three types of costs is the total manufacturing cost the total cost of making the product Direct labor cost and factory overhead cost are conversion costs which means they are needed in order to convert direct materials into products Product cost also includes cost of goods sold COGS expense which is the direct materials direct labor and factory overhead cost of the goods sold in the current period Period Costs are recorded as an expense on the income statement Period costs include selling expenses which are the costs supporting product sales this period and administrative expenses which are costs of running the office this period Manufacturing businesses accumulate product costs 1 to help them set a price for goods that will generate profit 2 to control operations costs by department compare actual costs to budgeted costs and 3 to develop financial statements required by GAAP cost of ending inventory


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UT Knoxville ACCT 200 - Final Exam Study Guide

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