LO2 LO3 FOB Shipping Point Ownership of the Goods passes to the buyer when the public carrier accepts the good from the seller Buyer pays freight cost FOB Destination Ownership of the goods remains with the seller until the goods reach the buyer Seller pays freight cost Assume upon delivery of the goods on May 6th Sauk Stero pays Public Freight Company 150 for Freight Charges the entry on Sauk Stereos books is May 6 Inventory Cash 150 150 Freight Out Expense for seller Freight in Buyer pays for the shipping inventory Purchaser may be dissatisfied because goods are damaged of defective of inferior quality or do not meet specifications Purchase Return Return goods for credit if sale was made on credit or for a cash refund if the purchase was for cash Purchase Allowance Credit terms may permit buyers to claim a cash discount for a prompt payment Advantages A purchaser saves money Shortens operating cycle 2 10 n 30 2 discount if the buyer pays within 10 days otherwise net amount due within 30 days 1 10 EOM 1 discount if paid within the first 10 days of next month n 10 EOM Net amount due within the first 10 days of the next month Sales revenue like service revenue is recorded when the performance obligation is satisfied Flip side of purchases returns and allowances Contra revenue account to Sales revenue Debit Sales not reduced Debited Because Would obscure importance of sales returns and allowances as a percentage of sales Could distort comparisons Credit Subtract Debit Gainszzzzz QUESTION in ANSWER The cost of goods sold is determined and recorded each time a sale occurs A perpetual inventory system only Sales discounts are offered to promote prompt payments and Contra revenue account to Sales revenue Contra revenue is a deduction from the gross revenue reported by a business which results in net revenue Contra revenue transactions are recorded in one or more contra revenue accounts which usually have a debit balance as opposed to the credit balance in the typical revenue account 1 Company does not realize any type of profit or income until total revenue LO4 Single Step Income Statement Subtract total expenses from total revenue Two reasons for using a single step format exceed total expenses 2 Form is simple and Easy E to read Multi Step Income Statement Highlights the component s of net income Three important line items 1 Gross profit 2 3 Net income Income from operations Sales Revenue Less Sales return and allowances Sales discounts Net Sales The multiple step income statement for a merchandiser shows each of the following features except QUESTION ANSWER LO5 QUESTION Investing activities section Cash Flow Statement Beginning inventory Purchases that occur in the year Cost of Goods available for sale Ending inventory Cost of Goods Sold AEROSMITHS Company s accounting records show the following at the yearend December 31 2014 Purchase Discounts 3 400 162 500 Purchases Ending Inventory 20 000 6 100 Freight In Beginning Inventory 18 000 Purchase Returns and Allowances 5 200 Assuming that AEROSMITH Company uses the periodic system compute a cost of goods purchased and b cost of goods sold 162 500 5 200 3 400 6 100 18 000 160 000 a 178 000 20 000 158 000 b LO6 Gross Profit Rate may be expressed as a percentage by dividing the amount of gross profit by net sales Gross Profit Rate Gross Profit Net Sales Profitability Measurement Decline in the gross profit rate might have several causes 1 Selling products with a lower Markup 2 3 Company forced to pay higher prices so its suppliers without being able to Increased competition may result in lower selling price pass these cost on to its customers Profit Margin Ratio Measures the percentage of each dollar sales that results in net income Profit Margin Ratio Net Income Sales LO7 8 QUESTIONS 9 A cash discount claimed by a buyer for prompt payment of a balance due PURCHASE DISCOUNT 10 An account that is offset against a revenue account on the income statement CONTRA REVENUE ACCOUNT
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