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** 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 5Merchandising Operations and the Multiple Step Income StatementMerchandising Operations (buy & sell)Retailers: Buy & sell directly to consumerWholesalers: Companies that sell to retailersSales Revenue – Cost of Goods Sold = Gross Profit *Gross Profit* – Operating Expense = Net Income (loss)Cost of Goods Sold (CGS): total cost of merchandise soldFlow of costs (for merchandising)Beginning Inventory + Cost of Goods Purchased=Cost of Goods Available for sale-(less) Cost of Goods sold = Ending InventoryInventory 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 periodTo determine CGS:Beginning Inventory + Cost of Goods purchased – Ending InventoryPurchases can be made with cash or an account (each purchase should be supported with an invoice)Purchase InvoiceIncludes seller, invoice date, purchaser, salesperson, credit terms, freight terms, goods sold, & total invoice amountFreight CostsSales agreement indicates who pays to transport the goodsFOB (free on board)FOB Shipping PointSeller places the goods FOB the carrierBUYER pays the shipping costsFOB DestinationSeller places the goods FOB to buyers place of businessSELLER pays the freight costsFreight Cost:Buyer pays (Shipping point)Seller pays (Destination)Purchase Discounts (cash discount) pg. 230Credit termsSpecify the amount of discount & time when its offeredSeller makes two entries for each salea. Record the sale, increase in cash or account receivableb. Record the decrease in inventorySales Returns and Allowances (Contra revenue account)(normal balance is a debit)*debit contra account instead of salesSales discount (cash discount) (contra revenue account)For prompt paymentIncome Statement PresentationTwo formsSingle StepMultiple Step (great example on page 239)** The two income statements will produce the same results, one just has more detailSingle Step Income StatementNet Income = Revenues – ExpensesAll 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 - CGSIncome from Operations = Gross profit – operating expenseNet Income = Add/Subtract the results of activities not related to operatingNet Sales (sales revenue): Sales – Sales returns/ allowances and Sales discounts (both contra accounts)Gross Profit (represents the merchandising profit of a company)Sale revenue – CGSNon-operating activities: consists of various revenues and expenses, gains and losses that are unrelated to the companies main line of operationsCost of Goods Sold under Periodic SystemBeginning Inventory+Cost of Goods PurchasedCost of Goods Available for Sale- Ending InventoryCost of Goods soldGross Profit Rate (expressed as a percentage)Divide gross profit by net salesi.e. Gross Profit ($144,000) Net Sales ($460,000)Gross Profit Rate = 31.1%Profit Margin Ratio (measures the percentage of dollar sales that results in net income)Divide net income by net salesWhat’s the difference? Practice: pg. 245Gross profit: measures the margin by which selling price exceeds CGSProfit Margin: measures the extent by which selling price covers all expenses (including CGS)Chapter 6Reporting and Analyzing InventoryMerchandise Inventory1.Owned by the company2. In a form ready for sale to customers in the ordinary courseManufacturing Inventory (not all inventory is ready for sale)1. Finished goods (ready for sale)Tractors completed and ready for sale2. Work in process (begun production but not yet complete)Tractors on the assembly line in all stages of production3. Raw materials (basic goods to be used in production)Steel, glass, and tires on hand waiting to be used in productionDetermining OwnershipGoods 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 goodsFOB Destination: Ownership is passed to the buyer when the order is receivedConsigned goods: Goods held for sale by one party although the ownership of the goods is retained by another partyInventory CostingSpecific 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 inventory item)Cost Flow Assumptions (this is huge on the test, practice don’t just memorize)1. FIFO (First in & First out)2. FIFO (Last in & First out)3. Average Cost* I have hand written notes following the typed pages with a hand written example of each method** 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 usedFIFO: assumes that the earliest goods purchased are the first to be sold (regardless of what actual unit is sold)Ending inventory is determined by taking the unit cost of the most recent purchases and working backwards until all units of inventory have been costedCalculate the cost of goods sold by subtracting the cost of the units not sold (ending inventory) from the cost of the goods available for saleDetermine Cost of Goods sold by pricing the first 550 units acquired and soldLIFO: 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 purchasedEnding inventory is based on the prices of the oldest units purchasedAverage cost method explained in detail on attached hand written sheets Complete the Do It! Problem on pg. 285 GREAT PRACTICE for these methodsCompanies use different cost flow methods because ofIncome statement effectsBalance sheet effectsTax effectsTo management, a higher net income is an advantage: It causes external users to view the company more favorablyLower of Cost or Market (LCM)When the value of inventory is lower


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FSU ACG 2021 - Exam 2

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