Accounting Exam 3 Chapter 4 Notes Merchandising Business Sales Cost of Merchandise sold Gross profit Operating Expenses Net income When merchandise is sold the revenue is reported as sales and its cost is recognized as an expense called cost of merchandise sold Cost of merchandise sold the cost that is reported as an expense when merchandise or a manufactured product is sold also called cost of goods sold Gross profit Sales minus the COMS Merchandise Inventory Merchandise on hand not sold at the end of an accounting period this is recorded on the balance sheet as a current asset Service Business Fees Earned Operating Expenses Net income On the income statement for a service business the revenues from services are reported as fees earned Multi Step Income Statement A from of income statement that contains several sections subsections and subtotals Revenue from sales includes sales sales returns and allowances sales discounts Net sales Income from Operations also called operating income Gross profit operation expenses o Operating expenses are either are classified as selling or administrative expenses Selling Expenses Expenses that are incurred directly in the selling of merchandise Sales salaries store supplies used deprecation of store equipment delivery expense and advertising Administrative expenses general expenses Expenses that are incurred in the administration or general operations of the business Office salaries depreciation of office equipment and office supplies Other income Revenue from sources other than the primary operating activities of a business Interest rent and gains resulting from the sale of fixed assets Other expense Expenses that cannot be traced directly to operations Interest expense and losses from disposing of fixed assets Single step Income Statement A form of income statement in which the total of all expenses is deducted from the total of all revenue The bad thing about this is that gross profit and income from operations are not reported Balance sheet Account Form vs Report form Account Form Assets are on the left hand side and the liabilities and stockholders equity on the right hand side Report Form Assets liabilities and stockholders equity are reported in a downward sequence Sales made to customers using credit cards issued by banks such as MasterCard or VISA are treated as Cash Sales Did she say to do this in class too Sales Discounts Invoice The bill that the seller sends the buyer Credit terms Terms for payment on account by the buyer to the seller Credit period The amount of time the buyer is allowed in which to pay the seller Discounts taken by the buyer for early payment are recorded as sales discounts by the seller The seller normally records the sales discounts in a separate account The sales discounts account is a contra account to sales When you sell something with a discount your cash your cash will go up the sale amount minus the discount and this amount will go under your statement of cash flows as operating your accounts receivable with go down by the full sale amount and your retained earnings under stockholders equity goes down by the discount amount This goes under the income statement as a sales discount expense Sales Returns and Allowances Credit memorandum A form issued by the seller to inform the buyer of the amount the seller proposes to decrease the accounts receivable accounts due from the buyer Sales returns and allowances reduce sales revenue The seller records sales returns and allowances in a separate account Contra account to sales On the income statement sales returns and allowances decreases as an expenses and cost of merchandise sold goes up and against that sort of like a revenue to get net income So Income statement Cost of merchandise sold sales returns and allowances Net income If cash if refunded for merchandise returned or for an allowance the seller increases sales returns and allowances and decreases cash Purchase Discounts With a discount when paying the invoice the buyer decreases the merchandise inventory account for the amount of the discount in this way the merchandise inventory shows the net cost to the buyer So the buyer s cash will decrease the price discount and merchandise inventory will decrease the amount of the discount and then accounts payable would decrease the full amount owed at original price Under statement of cash flows operating expenses decrease by what was paid Purchases Returns and Allowances Debit Memorandum issued by the buyer and indicates the amount the buyer proposes to decrease the accounts payable account Another way to define it informs the seller of the amount the buyer proposes to decrease to the account payable due the seller Also included reasons for return or the request for a price reduction Buyer decreases accounts payable and decrease merchandise inventory When a buyer returns merchandise or has been given an allowance before paying the invoice the amount of the debit memorandum is deducted from the invoice amount o Original invoice price returns Amount due before the discount the discount the amount due within the discount period Freight and Sales Taxes FOB Free on board shipping point The buyer pays the freight costs from the shipping point to the final destination This is part of the buyer s total cost of acquiring the merchandise inventory so the cost should be added to the cost of inventory by increasing merchandise inventory FOB Free on board destination The seller owns the goods while in transit and pays for shipping and freight costs This is an increase to delivery expense or freight out reported on the seller s income statement as an expense