Financial Accounting Exam 2 Study Guide Chapter 5 Merchandising Operations and Multiple Step Income Statement o Merchandising Operations The primary source of revenues is referred to as sales revenue or sales company The operating cycle ordinarily is longer than that of a service Cash buy inventor Merchandise inventory Sell inventory Accounts Receivable Receive Cash The flow of Cost The company used either a perpetual inventory system or a periodic inventory system to account for inventory Oak Tree Formula perpetual method o Beginning inventory add net purchases good o Goods available for sale deduct ending inventory available for sale cost of goods sold Inventory is usually largest asses and Cost of Goods sold is usually largest expense Gross Margin Gross Profit Formula NOT AN ACCOUNT o Sales revenue cost of goods sold Gross profit o Income statement presentation Multiple step Income Statement Used in real life Considered more useful because it highlights the components of net income o Gross profit o Incomes from operations o Net income Separates gross profit before net income Multiple step for single step income statement Still have the same bottom line Single step revenues expenses net income Multiple step gross profit operating expenses other items net income o Making profit from sales Important when looking at company from outside source o Merchandising Operations Flow of Costs Periodic system o Done at the end of the accounting period o Small companies with big ticket items use periodic o Calculation of Cost of Goods sold OAK TREE system FORMULA Only record one transaction during the year must use oak tree formula at the end Perpetual systems o Always know o Keep tract of inventory and cost of goods sold at all Done with each transaction o Records show inventory that should be in hand o A physical inventory is still done at the end of the times continuously period Inventory account is usually higher than actual inventory Make adjustments entries If its not there it s a cost of good sold no matter if stole sold lost etc o Inventory Cost Cost principle when you buy something it keeps the total price you paid for it record it at that price The amount recorded for inventory should include any cost necessary to get inventory to your business in order to sell o Invoice price freight charges insurance in transit preparation costs etc Shipping for example is part of net cost it IS NOT A SEPERATY EXPENSE o Recording Purchases of Merchandise Example Ron s wine shop purchases 700 of inventory on credit Terms are FOB shipping FOB shipping Free on board shipping o Shows who owns merchandise in transit and who pays the shipping On example We would debit inventory 700 and credit accounts payable 700 FOB shipping Transportation Freight costs Easier to look from seller prospective o FOB shipping point seller only has to get it to shipping point buyer pays shipping Indicates that the title to the goods changes hands at shipping o FOB destination point seller has obligation to get it to destination Seller pays shipping Indicates that the title to the good changes hands at the destination Whoever has to pay shipping has the title o Example Purchase one case of wine with 12 bottles for 100 and its FOB destination seller pays later you sell a bottle for 20 what is the net profit 10 because in addition to the 100 for the wine itself you are liable for paying the 20 of shipping which makes the total 120 or 10 a bottle When you sell one bottle for 20 the cost of good sold was 10 o Example You bough wine at 10 a bottle and later you sell it for 20 and FOB shipping point buyer pays shipping of 3 what is your gross profit 10 because you sold the bottle for 20 compared to the 10 and you are not liable to pay for the shipping The buyer is the one responsible to pay for the shipping to their house o Shipping Costs Shipping costs incurred in purchasing inventory are included as part of the cost of the inventory When you debit inventory Shipping costs for a sale are an operating expense Typically called Freight out o Recording Purchases of Merchandise Purchase Returns and allowance Part of inventory for perpetual method Purchase return focus more on in the class return goods for credit if the sale was made on credit or for a case refund it the purchases was for cash Purchase allowance may choose to keep the merchandise if the seller will grant an allowance deduction from the purchases price Example Ron s wine shop returns inventory costing 300 Debit accounts payable by 300 because you don t owe the company for the inventory returned and credit inventory by 300 because you are decreasing inventory by 300 when you return Purchase Discounts Given to company o Discount to giving money early paying in full o Credit terms may permit buyers to claim a cash discount for early payment Advantages Purchaser saves money Seller shortens the operating cycle gets cash quicker Cash discounts o 2 10 n 30 numbers change for different questions but keep the same setup The 2 represents the percentage of discount The 10 represent the number of days the discount is available for Must pay in that time to get the discount The n or net is if unable to receive the discount the full amount is due The 30 represents the number of days when full amount is due by o Example Ron s wine shop pays the balance due of 400 gross invoice price of 700 less purchases returns and allowance of 300 on May 14 the last day of the accounting period Debit Accounts payable by 400 because you no longer have a liability of 400 to pay to the company Because there is a 2 percent discount for paying early in order to find how much to credit inventory for you need to find the savings 400X 02 8 discount So you must credit inventory by 8 and debit cash by 392 because Ron s got 8 discount of cash they owe If Ron s wine shop didn t take the discount the transaction would just be debit accounts payable by 400 and credit cash by 400 Recording Sales of Merchandise Two journal entries to record a sale First entry deals with the sale o Debit cash or accounts receivable o Credit Sales Second entry deals with the merchandise that you sold o Debit cost of goods sold o Credit Merchandise inventory Example o Ron s wine shop sells 70 percent of their inventory for 420 on account 70 percent of inventory would be 350 500X 70 First transaction o Debit Accounts receivable for 420 and credit sales 420 Second transaction o Debit Cost of Goods Sold for 350 and credit inventory
View Full Document
Unlocking...