BMGT220 CHAPTER 5 Midterm 2 Study Guide Service Merchandising Companies Merchandising Company Wholesalers sell to retailers Retailers sell to consumers Primary source of revenue is sales Measuring Net Income is a company that buys sells goods to earn a profit Expenses for a merchandising company are split between cost of goods sold total cost of merchandise sold during the period and operating expenses expenses incurred in the process of earning sales revenue ex Salaries insurance expense Sales revenue COGS Gross Profit Operating Expenses Net Income loss Cash buys inventory merchandise inventory sell inventory accounts Operating Cycle receivable receive cash Inventory Systems Perpetual System detailed record of the cost of each item are maintained and the cost of each item sold is determined from records when the sale occurs 1 determine cost of goods on hand beginning of accounting period 2 Add to it the cost of goods purchased 3 Subtract the cost of goods on hand at the end of the accounting period Record purchase of inventory record revenue COGS time of sale no entry end of period Periodic System accounting period cost of good sold is determined only at the end of an Record purchase of inventory record revenue only time of sale compute and record COGS end of period Service Company Operating Cycle Cash perform service accounts receivable receive cash Recording of Purchases in a P I S Purchase of Merchandise merchandise inventory is debited and accounts payable is credited Resale Purchases may be made for cash or on account credit Purchase is normally recorded by purchaser when goods are received from seller Each credit purchase should be supported by a purchase invoice Freight Costs FOB Shipping Point is when the buyer pays freight costs Debit Merchandise Inventory Credit Cash FOB Destination is when the seller pays freight costs Debit Freight Out or Delivery Expense Credit Cash Purchase Returns Allowances Why Damaged defective Inferior quality Not what buyer wanted Purchase Return Debit Accounts Payable Credit Merchandise Inventory Purchase Discount Purchase Discounts for the prompt payment of a balance due Based on the Invoice cost returns allowances If payment is made within discount period Debit Accounts Payable Credit Cash Merchandise Inventory amount of discount If payment is made after the discount period Debit Accounts Payable Credit Cash for the full amount Recording of Sales Revenue Under a P I S Sales Transactions Revenues reported when earned b c of the revenue recognition principle Revenues are earned when goods are transferred from seller to buyer Cash Sales Debit Cash Credit Sales are credit terms that allow the buyer to claim a cash discount AND Debit COGS Credit Merchandise Inventory Credit Sales Debit Accounts Receivable Credit Sales AND Debit COGS Credit Merchandise Inventory Sales Returns Allowances Debit Sales Returns Allowances Credit Accounts Receivable AND Debit Merchandise Inventory Credit COGS Sales Discounts Contra revenue account to sales account normal balance of SR A is debit The Seller Must Sales discounts of a balance due are the offer of a cash discount to a buyer for the prompt payment Ex 3 10 n 30 3 discount if payment is made within 10 days after 10 there is no discount and balance is due in 30 days Contra revenue account w a normal debit balance If payment is made within the discount period Debit Cash full amount discount Sales Discount amount discounted Credit Accounts Receivable Steps in Accounting Cycle Merchandising Company Closing Entries Debit Sales Credit Income Summary COGS is a new account that must be closed After closing entries all temp accounts have ZERO balance Retained Earnings credit balance beginning balance net income dividends Multi Step vs Single Step Income Statements Single Step Total Revenues Total Expenses Net Income Loss Multiple Step highlights the components of net income distinguishes btwn operating non operating activities Sales COGS Gross Profit Operating Expenses Income from Operations or Non operating activities Net Income neither both Net Sales Retained Earnings Income from Operations Net Income COGS both Gross Profit both multiple step only multiple step only Gross Profit represent overall profit Net Sales COGS Gross Profit Merchandising profit b c operating expenses have not been deducted doesn t Comparing GP to past GP s helps to indicate the effectiveness of the companies purchasing and pricing policies GP Net Sales percentage Gross Profit Rate Gross Profit Operating Expenses Income from Operations Non Operating Expenses revenues gains expenses losses are shown after income from operations other Revenues Gains Interest revenues notes receivables marketable securities Dividend revenue from investments in capital stock Rent revenue from subleasing Gains from sale of property plant and equipment Expenses Losses Interest expense on notes payable loans payable Casualty losses from recurring causes ex Vandalism accidents Losses sale abandonment of property plant equipment or from strikes by employees suppliers Recording of Sales Purchases under a Periodic System are used to record purchases freight costs returns Separate Accounts discounts Running account of changes is NOT made The balance in ending inventory COGS for the period is calculated the end of the period COGS Beginning inventory net purchases freight in ending inventory Buyer Purchase on Account Debit Purchases rather than merchandise inventory Credit Accounts Payable When FOB Shipping Point Debit Freight in Credit Cash Purchase Return credit Purchase Discounts Debit Accounts Payable Credit Purchase Returns Allowances temp account normal balance is Debit Accounts Payable Credit Cash Purchase Discounts temp account normal balance is credit Seller Sales on Account Debit Accounts Receivable Credit Sales Sales Return Debit Sales Returns Allowances Credit Accounts Receivable Sales Discounts Debit Cash Sales Discount Credit Accounts Receivable CHAPTER 6 Determining Inventory Quantities Why determine inventory quantities Perpetual System users take a physical inventory to Check the accuracy of their perpetual inventory records Determine the amount of inventory lost due to wasted raw materials shoplifting or employee theft Period System users take a physical inventory to Determine the inventory on hand the balance sheet date Determine the cost of goods sold for the period Determine the amount of inventory date value them 1 take physical inventory actual
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