Accounting Exam 2 Chapters 5 6 8 9 Chapter 5 Accounting for Merchandising Purchases Merchandising Businesses Merchandising Businesses Income Measurement Sales Revenue Less Not used in a Service business Cost of Goods Sold Equals Gross Profit Less Cost of goods sold an Expense is the total cost of merchandise sold during the period Operating Expenses Equals Operating Income Loss Merchandising Businesses Merchandising Businesses Cost of Beginning Cost of Beginning inventory inventory Net cost of Net cost of purchases purchases Cost of goods Cost of goods available for sale available for sale Cost of Ending Cost of Ending inventory inventory Cost of goods Cost of goods sold sold Operating Cycle Operating Cycle Merchandising Operations Merchandising Operations Flow of Costs in Perpetual Inventory System Purchases increase Merchandise Inventory Freight costs Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory 3 Cost of Goods Sold is increased and Merchandise Inventory is decreased for each 1 2 sale 4 Physical count done to verify Merchandise Inventory balance The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold Merchandising Operations Merchandising Operations Flow of Costs in a Periodic Inventory System 1 Purchases of merchandise increase Purchases 2 Ending Inventory determined by physical count 3 Calculation of Cost of Goods Sold Beginning inventory 100 000 Add Purchases net 800 000 Goods available for sale 900 000 Less Ending inventory 125 000 Cost of goods sold 775 000 Recording Transportation Freight Costs Recording Transportation Freight Costs Seller Buyer FOB shipping point buyer pays freight costs Merchandise FOB destination seller pays freight costs Terms FOB shipping point FOB destination Ownership transfers to buyer when goods are passed to Carrier Buyer Transportation costs paid by Buyer Seller Recording Purchase Discounts Recording Purchase Discounts A deduction from the invoice price granted to induce early A deduction from the invoice price granted to induce early payment of the amount due payment of the amount due Advantages Advantages Purchaser saves money Purchaser saves money Seller shortens the operating cycle Seller shortens the operating cycle 2 10 n 30 2 10 n 30 Discount Discount Percent Percent Number of Number of Days Days Discount Is Discount Is Available Available Otherwise Otherwise Net or All Is Net or All Is Due Due Credit Credit Period Period Recording Sales of Merchandise Recording Sales of Merchandise Made for cash or credit on account Normally recorded when earned usually when goods transfer from seller to buyer Sales invoice should support each credit sale Two Journal Entries to Record a Sale Cash or Accounts receivable XXX Sales Cost of goods sold XXX Merchandise inventory 1 2 Selling Price XXX Cost XXX Recording returns of Merchandise Sold Recording returns of Merchandise Sold Sales Returns and Allowances Contra revenue account debit Sales not reduced debited because would obscure importance of sales returns and allowances could distort comparisons between total sales in different as a percentage of sales accounting periods Forms of Financial Statements Forms of Financial Statements Multiple Step Income Statement Shows several steps in determining net income Two steps relate to principal operating activities Distinguishes between operating and non operating activities Illustration 5 13 Forms of Forms of Financial Financial Statements Statements Multiple Step Key Items Net sales Gross profit Operating expenses Illustration 5 13 Forms of Forms of Financial Financial Statements Statements Key Items Net sales Gross profit Operating expenses Nonoperating activities Net income Forms of Financial Statements Forms of Financial Statements Single Step Income Statement Subtract total expenses from total revenues Two reasons for using the single step format 1 Company does not realize any type of profit until total revenues exceed total expenses 2 Format is simpler and easier to read Forms of Financial Statements Forms of Financial Statements Single Step Chapter 6 Inventories Perpetual First In First Out FIFO Method Perpetual First In First Out FIFO Method Purchases Cost of Goods Sold Date Aug 1 Aug 3 Aug 14 10 15 91 106 910 1 590 Aug 17 20 Aug 28 10 Aug 31 115 119 2 300 1 190 Inventory Balance 910 2 500 530 2 830 4 020 1 420 10 10 91 106 910 1 060 5 18 106 115 530 2 070 Perpetual First In First Out FIFO Method Perpetual First In First Out FIFO Method Here are the journal entries to record the purchases and sales entries for Wally Mart The numbers in red are determined by the cost flow assumption used All purchases and sales are made on credit The per unit selling price of inventory was as follows 8 14 130 8 31 150 Aug 3 Merchandise inventory 1 590 Aug 14 Accounts receivable 2 600 Accounts payable Sales Aug 14 Cost of goods sold 1 970 Aug 17 Merchandise inventory 2 300 Merchandise inventory 1 970 Aug 28 Merchandise inventory 1 190 Aug 31 Accounts receivable 3 450 Accounts payable Accounts payable Sales Aug 31 Cost of goods sold 2 600 Merchandise inventory 2 600 1 590 2 600 2 300 1 190 3 450 Perpetual Last In First Out LIFO Method Perpetual Last In First Out LIFO Method Purchases 91 10 910 15 106 1 590 Cost of Goods Sold 20 115 10 119 2 300 1 190 15 106 5 91 1 590 455 10 119 13 115 1 190 1 495 Inventory Balance 910 2 500 455 2 755 3 945 1 260 Date Aug 1 Aug 3 Aug 14 Aug 17 Aug 28 Aug 31 Additional purchases were made on August 17 and 28 Additional purchases were made on August 17 and 28 Twenty three bikes were sold on August 31 Twenty three bikes were sold on August 31 Perpetual Last In First Out LIFO Method Perpetual Last In First Out LIFO Method Here are the journal entries to record the purchases and sales entries for Trekking The numbers in red are determined by the cost flow assumption used All purchases and sales are made on credit The per unit selling price of inventory was as follows 8 14 130 8 31 150 Aug 3 Merchandise inventory 1 590 Aug 14 Accounts receivable 2 600 Accounts payable Sales Aug 14 Cost of goods sold 2 045 Aug 17 Merchandise inventory 2 300 Merchandise inventory 2 045 Aug 28 Merchandise inventory 1 190 Aug 31 Accounts receivable 3 450 Accounts payable Accounts payable Sales Aug 31 Cost of goods sold 2 685 Merchandise inventory 2 685 1 590 2 600 2 300 1 190 3 450 Perpetual Weighted Average Cost Method Perpetual Weighted Average Cost Method When
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