ACG2021 Test 2 Notes Chapter 5 Merchandising Operations and the Multiple Step Income Statement Merchandising Companies o Buy and sell goods o The primary source of revenues is referred to as sales revenue or sales Income Measurement during the period Operating Cycles o Cost of goods sold COGS is the total cost of merchandise sold o Revenue COGS Gross Profit Operating Expenses Net Income o The operating cycle of merchandising company ordinarily is longer than that of a service company What costs are included in inventory o All the costs to a acquire the inventory and b to get it ready for sale Includes freight in insurance packaging Does NOT include violations of law repair and maintenance Flow of Costs expenses or freight out o Companies use either a perpetual inventory system or a periodic inventory system to account for inventory o Periodic Beg inventory purchases cost of goods available for sale end inventory cost of goods sold COGS Ending inventory is determined by a physical count o Perpetual System Maintain detailed records of the cost of each inventory purchase and sale Records continuously show inventory that should be on hand Company determines cost of goods sold each time a sale occurs o Periodic System Do not keep detailed records of the goods on hand Determine cost of goods sold only at end of accounting period Physical inventory count to determine cost of goods on hand Additional Consideration o Perpetual System Traditionally used for merchandise with high unit values Provides better control over inventories Requires additional clerical work and additional cost to Recording Purchases of Merchandise maintain inventory records o Made using cash or credit on account o Normally recorded when goods are received o Purchase invoice should support each credit purchase Freight Costs Terms of Sale o FOB Shipping Point Seller places goods Free On Board the carrier and buyer pays freight costs Dr Inventory Cr Cash Dr Accounts Receivable Cr Cash Purchase Returns and Allowances o FOB Destination Seller places goods Free On Board to the buyer s place of business and seller pays freight costs o Purchaser may be dissatisfied because goods are damaged or defective of inferior quality or do not meet specifications o Purchase return return goods for credit if the sale was made on credit or for a cash refund if the purchase was for cash o Purchase allowance may choose to keep the merchandise if the seller will grant an allowance deduction from the purchase price In a perpetual inventory system a return of defective merchandise by a purchaser is recorded by crediting merchandise inventory o Credit terms may permit buyer to claim a cash discount for a prompt Purchase Discounts payment o Advantages Purchaser saves money Seller shortens the operating cycle o EX Credit terms of 2 10 n 30 is read two ten net thirty 2 cash discount if payment is made within 10 days Otherwise net mount due within 30 days Recording Sales of Merchandise o Made for cash or credit on account o Normally recorded when earned usually when goods transfer from seller to buyer o Sales invoice should support each credit sale Sales Returns and Allowances o Flipside of purchase returns and allowances o Contra revenue account debit o Sales not reduced debited because Would obscure importance of sales returns and allowances as Could distort comparisons between total sales in different a percentage of sales accounting periods The cost of goods sold is determined and recorded each time a sale occurs in neither a periodic nor perpetual inventory system 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 until total revenues exceed total expenses 2 Format is simpler and easier to read Multiple Step Income Statement o Considered more useful because it highlights the components of net income o Three important line items 1 Gross profit 2 Income from operations 3 Net income The multiple step income statement for a merchandiser shows each of the following features except investing activities section Determining Cost of Goods Sold Under a Periodic System o Know the advantages disadvantages Chapter 6 Reporting and Analyzing Inventory Classifying Inventory o Merchandising Company One classification 1 Merchandise Inventory o Manufacturing Company Three classifications 1 Raw Materials 2 Work In Progress 3 Finished Goods o Regardless of the classification companies report all inventories under Current Assets on the balance sheet Physical Inventory taken for two reasons o Perpetual System 1 Check accuracy of inventory records 2 Determine amount of inventory lost o Periodic System 1 Determine the inventory on hand 2 Determine the cost of goods sold for the period Taking a Physical Inventory o Involves counting weighing or measuring each kind of inventory on hand Taken When the business is closed or when business is slow At end of the accounting period Determining Ownership of Goods o Goods in Transit Purchased goods not yet received Sold goods not yet delivered Terms of Sale o FOB Shipping Point FOB Destination Point See chapter 5 Goods in transit should be included in the inventory of the buyer when the public carrier accepts the goods from the seller AND terms of sale are FOB shipping point Consigned Goods goods held for sale by one party although ownership of the goods is retained by another party not very important Inventory Costing o Unit costs can be applied to quantities on hand using the following costing methods Specific Identification Practice is relatively rare Most companies make Cost Flow Assumptions about which units are sold First in first out FIFO First ones in the door first out the door Last in first out LIFO Last ones in the door first out the door Average cost ALL 4 ARE COST FLOW ASSUMPTIONS Cost 1 2 EX Transaction 9 1 Beg Inv 9 3 Purchased 9 5 Sold 9 7 Purchased Ending Inv COGAFS 1 400 Add up the layer column Periodic Units 100 200 150 10 300 450 units 3 Layer 100 400 900 o COGS 200 o Ending Inventory 1 200 o COGS 150 x 2 33 350 FIFO WA LIFO Perpetual FIFO 1 400 600 units 2 33 COGAFS Number of available units o Ending Inventory 450 x 2 33 1 050 o COGS 150 units x 3 450 o Ending Inventory 100 400 450 950 OR COGAFS COGS o Cogs 200 Beg Inv AND 50 units purchased 100 x 1 50 x 2 o Ending Inventory 1 200 WA o Cogs 250 500 300 units 1 67 o Ending Inventory 150 x 1 67 300 x 3 1 150 2 55 per unit cost 1 150 450 LIFO
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