Accounting Exam 2 Chapters 5 9 This cannot be the only thing that you study Use this as a review guide and complete each Chapters Do It problems the Wiley Plus homework and the Exam review The way to pass this exam is to understand the concept and practice not simply memorize definitions Chapter 5 Merchandising Operations and the Multiple Step Income Statement Merchandising Operations buy sell Retailers Buy sell directly to consumer Wholesalers Companies that sell to retailers Sales Revenue Cost of Goods Sold Gross Profit Gross Profit Operating Expense Net Income loss Cost of Goods Sold CGS total cost of merchandise sold Flow of costs for merchandising Beginning Inventory Cost of Goods Purchased Cost of Goods Available for sale less Cost of Goods sold Ending Inventory Inventory Systems Perpetual each time a sale occurs detailed records of each purchase sale Periodic at the end of the period CGS is determined at the end of the accounting period To determine CGS o Beginning Inventory Cost of Goods purchased Ending Inventory Purchases can be made with cash or an account each purchase should be supported with Includes seller invoice date purchaser salesperson credit terms freight terms goods sold total invoice amount an invoice Purchase Invoice Freight Costs FOB free on board FOB Shipping Point FOB Destination Sales agreement indicates who pays to transport the goods Seller places the goods FOB the carrier BUYER pays the shipping costs Seller places the goods FOB to buyers place of business SELLER pays the freight costs Freight Cost Buyer pays Shipping point Seller pays Destination Purchase Discounts cash discount pg 230 Credit terms Specify the amount of discount time when its offered Seller makes two entries for each sale a Record the sale increase in cash or account receivable b Record the decrease in inventory Sales Returns and Allowances Contra revenue account normal balance is a debit debit contra account instead of sales Sales discount cash discount contra revenue account For prompt payment Income Statement Presentation Two forms Single Step Single Step Income Statement Multiple Step great example on page 239 The two income statements will produce the same results one just has more detail Net Income Revenues Expenses All data is classified as either a Revenue operating non operating revenues and gains or Expense CGS operating non operating expense and losses Multiple Step Income Statement highlights the components of net income Thee important line items example pg 236 Gross profit Net sales CGS Income from Operations Gross profit operating expense Net Income Add Subtract the results of activities not related to operating Net Sales sales revenue Sales Sales returns allowances and Sales discounts both contra accounts Gross Profit represents the merchandising profit of a company Sale revenue CGS Non operating activities consists of various revenues and expenses gains and losses that are unrelated to the companies main line of operations Cost of Goods Sold under Periodic System Beginning Inventory Cost of Goods Purchased Cost of Goods Available for Sale Ending Inventory Cost of Goods sold Gross Profit Rate expressed as a percentage Divide gross profit by net sales i e Gross Profit 144 000 Net Sales 460 000 o Gross Profit Rate 31 1 Profit Margin Ratio measures the percentage of dollar sales that results in net income Divide net income by net sales What s the difference Practice pg 245 Gross profit measures the margin by which selling price exceeds CGS Profit Margin measures the extent by which selling price covers all expenses including CGS Chapter 6 Reporting and Analyzing Inventory Merchandise Inventory 1 Owned by the company 2 In a form ready for sale to customers in the ordinary course Manufacturing Inventory not all inventory is ready for sale 1 Finished goods ready for sale o 2 o 3 Tractors completed and ready for sale Work in process begun production but not yet complete Tractors on the assembly line in all stages of production Raw materials basic goods to be used in production o Steel glass and tires on hand waiting to be used in production Determining Ownership Goods in Transit on board a truck train ship or plane FOB Shipping point Ownership is passed to the buyer when the public carrier accepts the FOB Destination Ownership is passed to the buyer when the order is received Consigned goods Goods held for sale by one party although the ownership of the goods is goods retained by another party Inventory Costing inventory item 1 FIFO First in First out 2 FIFO Last in First out 3 Average Cost method Specific identification method An actual physical flow costing method in which items sold and items still in inventory are specifically coasted to arrive at cost of goods sold and ending inventory totals requires companies keep records of the original cost of each individual Cost Flow Assumptions this is huge on the test practice don t just memorize I have hand written notes following the typed pages with a hand written example of each It is not an accounting requirement that the cost flow assumption be consistent with the physical movement of the goods The value assigned to the ending inventory will depend on which cost flow method is used actual unit is sold FIFO assumes that the earliest goods purchased are the first to be sold regardless of what Ending inventory is determined by taking the unit cost of the most recent purchases and working backwards until all units of inventory have been costed o Calculate the cost of goods sold by subtracting the cost of the units not sold ending inventory from the cost of the goods available for sale Determine Cost of Goods sold by pricing the first 550 units acquired and sold LIFO assumes that the latest goods purchased are the first to be sold seldom coincides with the actual physical flow of inventory The first goods sold were the most recently purchased Ending inventory is based on the prices of the oldest units purchased Average cost method explained in detail on attached hand written sheets Complete the Do It Problem on pg 285 GREAT PRACTICE for these methods Companies use different cost flow methods because of Income statement effects Balance sheet effects Tax effects company more favorably Lower of Cost or Market LCM To management a higher net income is an advantage It causes external users to view the When the value of inventory is lower than its cost companies write down the inventory to its market value This is an example of the
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