ACCOUNTG 221 1st EditionExam # 2 Study Guide Lectures: 8-13Lecture 8 (Feburary 24 th ) Chapter 4 Merchandising Businesses Generate revenue by selling goods- The goods are purchased for resale are called merchandise inventory Inventory Tangible property that is held for resale or will be used in producing goods or services - Types: Merchandise (only worry about merchandise for this chapter)  Raw Materials  Work in process Finished goods  Inventory Cost Amount recorded for inventory includes:- Invoice price- Freight charges- Inspection costs- Preparation costs  Inventory consists of product acquired for resale to customers- Often = largest current asset on the balance sheet Inventory becomes and expense when sold  Allocation of Inventory Cost Between Asset and Expense Accounts Beg. Inventory balance + inventory purchased during the period = Cost of Goods Available for Sale  Gross Margin Good indication of how profitable a company is at the most fundamental level Companies with higher gross margins will have more money left over to spend on other business operations (such as research and development or marketing) Most commonly used in manufacturing/merchandising companies and not service  How to calculate:- Sales Revenue – Cost of Goods Sold = Gross Margin  Multi-Step Income Statement  Sales Less: Cost of Goods Sold = Gross Margin or Gross Profit Less: Operating Expenses = Net Income Ex. You bought 100 umbrellas for $6 each and sold 70 of them for $10 each  What is cost of goods sold?- $420 (6*70 = 420) Ex. You bought 100 umbrellas for $6 each and sold 70 of them for $10 each What is your gross profit for the month?- $280 (6*70 = 420 (Cost of Goods Sold) , 10*70=700 (Sales Revenue) , 700-420 = 280 (Gross Profit)) Multi-Step Income Statement  Sales = 700 Less COGS = (420) Gross Margin = 180 Less Operating Expenses = 0 Net Income = $180 Cost of Goods Sold How to Calculate: Beginning inventory Add: Purchases (net) = Goods Available for Sale Deduct: Ending Inventory  =Cost of Goods Sold *Cost of Goods Sold + Ending inventory = available  Current asset or liability = used or consumed in 1 yr or less Examples:  Supplies Prepaid’s  Cash  Unearned Revenue  Salary Payable Accounts Receivable Accounts Payable  Long- term asset or liability = used or consumed it for more than a year  Examples: Property Plant Equipment  Note Receivable  Note PayableLecture 9 (Feburary 26 th ) Chapter 4 Transportation Costs FOB= Free on Board FOB shipping point = BUYER pays- Account title = Transportation-in  Goes into inventory as the buyer  FOB destination = SELLER pays- Account title = Transportation- out  Goes into expense on buyers part  Discounts Cash discount = deduction from the invoice price granted to induce early payment ofthe amount due - 2/10, n/30 – what does this mean? 2= percentage of the discount 10 = # of days discount is available  n = Otherwise, the full amount is due 3- = # of days when full amount is due  Events Affecting Sales Sale of inventory often includes:- Inventory returns- Purchase allowances- Cash discounts  Ex. 1. JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/20 n/ 30. The merchandise had cost JPS $51,100.- This is an asset source transaction - Increases assets (accounts receivable)- Increases equity ( sales revenue) - Using the net method: 8,500 * 99% = 8,415 Ex. 2. The customer in Ex 1 returned inventory with a $1,000 list price that JPS had sold with 1/10 n/30 payment terms. The merchandise had originally cost JPS $600.- This is an asset use transaction- Decrease assets (accounts receivable)- Decrease equity ( retained earnings)- Using the net method: 1,000* 99% = $990 Ex. 3. JPS collected the balance of the account receivable from the customer that purchased the goods in Ex 1 within the discount period. - This is an asset exchange transaction- Increases assets (cash)- Decreases assets (accounts receivable)- Paid within the discount period: 8,415-990 = 7,425 Ex. 4 JPS collected the balance of the account receivable from the customer that purchased the goods in Ex 1 but DID NOT within the discount period.- This is an asset exchange and source transaction- Increases assets (cash)- Decreases assets (accounts receivable)- Increases equity (interest revenue) Not paying within the discount period: Cash payment 7,425 + 75 = 7,500 Accounts Receivable  8,415 – 990 = 7,425Lecture 10 (March 3 rd ) Events Affecting Sales Sales of inventory often involves Inventory returns Purchases allowances Cash discounts Ex. 1) JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/20 n/30. The merchandise had cost JPS $5,100.  Increase accounts receivable - Debit 8,500 Increases sales revenue (equity)- Credit 8,500 Increases cost of Costs Sold- Debit 5,100 Decrease inventory - Credit 5,100 Ex. 2) The customer in Event 1 returned inventory with a $1000 list price that JPS had sold with 1/10 n/30 payment terms. The merchandise had originally cost JPS $600. Decrease account receivable- Credit 1,000 Sales Return- Debit 1,000 Increases Inventory- Debit 600 Decreases COGS- Credit 600 Ex. 3) JPS collected the balance of the account receivable from the customer that purchased the goods in event 1 within the discount period.  Decreases Accounts Receivable - Credit 7,425 Increases Cash- Debit 7,425 Ex. 4) JPS collected the balance of the account receivable from the customer that purchased the goods in event 1 but not within the discount period. Decreases Accounts Receivable- Credit 7,500  Decreases Cash- Credit 7,500 Lost, Damaged or Stolen Inventory Most merchandise companies experience some level of inventory shrinkage Reflects decreases in inventory for reasons other than sales to customers Multistep Income Statement Sales Minus: COGS = Gross Margin Minus: Operating Expenses =Income before taxes Minus: Income Taxes =Net Income Other principals  Lower of Cost or Market: Ending inventory is reported at the lower cost or market (MCM)) Market refers to the replacement cost of the merchandise This practice is in keeping with the generally accepted account