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GSU ACCT 2101 - Chapter 5 Notes

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Chapter 5: Merchandising Operations and the Multiple-Step Income StatementChapter 5: Merchandising Operations and the Multiple-Step Income StatementMerchandising Operations:- Operating Cycles: the operating cycle of a merchandising company ordinarily is longer than that of a service company. - Flow of Costs: companies use either a perpetual inventory system or a periodic inventory system to account for inventory. o- Perpetual System:o Maintain detailed records of the cost of each inventory purchase or sale.o Records continuously show inventory that should be on hand for every item.o Company determines cost of goods sold each time a sale occurs.- Advantages of the Perpetual System:o Traditionally used for merchandise with high unit values. o Shows the quantity and cost of the inventory that should be on hand at any time. o Provides better control over inventories than a periodic system. - Periodic System:o Do not keep detailed records of the goods on hand. o Cost of goods sold determined by count at the end of the accounting period. o Calculation of Cost of Goods Sold: Beginning Inventory - $100,000Add: Purchases, Net – 800,000Goods Available for Sale – 900,000Less: Ending Inventory – 125,000Cost of Goods Sold - $775,000- Recording Purchases of Merchandise: o Made using cash or credit (on account).o Normally record when goods are received from the seller. o Purchase invoice should support each credit purchase. - FOB Shipping Point: ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. 2- FOB Destination: ownership of the goods remains with the seller until thegoods reach the buyer. - Purchase Return: return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. - Purchase Allowance: may choose to keep the merchandise if the seller will grant a reduction of the purchase price.- Purchase Discounts:o Credit terms may permit buyer to claim a cash discount for prompt payment. o Advantages:  Purchaser saves money.  Seller shortens the operating cycle by converting the accounts receivable into cash earlier.o 2/10, n/30: 2% discount if paid within 10 days, otherwise net amount due within 30 days.o 1/10 EOM: 1% discount if paid within first 10 days of next month.o n/10 EOM: net amount due within the first 10 days of the next month.- Recording Sales of Merchandise:o Made using cash or credit (on account).o Sales revenue, like service revenue, is recorded when the performance obligation is satisfied. o Performance obligation is satisfied when the goods are transferred from the seller to the buyer. 3o Sales invoice should support each credit sale. - Sales Returns and Allowances:o “Flip Side” of purchase returns and allowances. o Contra-Revenue Account to Sales Revenue (debit).o Sales not reduced (debited) because:  Would obscure importance of sales returns and allowances as a percentage of sales.  Could distort comparisons. - Sales Discount:o Offered to customers to promote prompt payment of the balance due. o Contra-Revenue Account (debit) to Sales Revenue.- Single-Step Income Statement:o Subtract total expenses from total revenues. o Two reasons for using the single-step format:1. Company does not realize any type of profit or income until total revenues exceed total expenses. 2. Form is simple and easy to read. 4o- Multiple-Step Income Statement:o Highlights the components of net income. o Three important line items:1. Gross profit.2. Income from operations.3. Net income.o- Determining Cost of Goods Sold Under a Periodic System:o No running account of changes in inventory. 5o Ending inventory determined by physical count. o Cost of goods sold not determined until the end of the period. o- Gross Profit Rate: may be expressed as a percentage by dividing the amount of gross profit by net sales. A decline in the gross profit rate might have several causes. o Selling products with a lower “markup.”o Increased competition may result in a lower selling price. o Company forced to pay higher prices to its suppliers without being able to pass these costs in to its customers. o6- Profit Margin Ratio: measures the percentage of each dollar of sales that results in net income. o Gross Profit Rate: measures the margin by which selling price exceeds cost of goods sold. o Profit Margin Ratio: measures the extent by which selling price covers all expenses (including costs of goods sold).o- Quality of Earnings Ratio = Net Cash Provided by Operating Activities/Net


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