ch 4 and ch 5 notes bundle
ch 4 and ch 5 notes bundle ACCT201A
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This 6 page Bundle was uploaded by Katherine Ann Turnbull on Monday September 28, 2015. The Bundle belongs to ACCT201A at Ball State University taught by in Summer 2015. Since its upload, it has received 15 views. For similar materials see Principles of Accounting I in Business at Ball State University.
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Date Created: 09/28/15
0 Exam 2 notes 0 Ch 4 Merchandise consists of products goods that a company acquires to resell to customers Merchandiser earns net income by buying and selling merchandise Wholesaler is an intermediary that buys products from manufacturers and sells them to retailers or other Wholesalers Retailer intermediary that buys products from manufacturers of Wholesalers and sells them to consumers 0 Reporting income for a merchandiser Net income equals revenuessales from selling merchandise minus both the cost of merchandise sold to customers and the cost of other expenses Cost of goods sold the expense of buying and preparing merchandise Gross profit gross margin Which equals net salesrevenues cost of goods sold See page 166 for income statement example 0 Reporting inventory for a merchandiser Balance sheet includes a current asset call MERCHANDISE INVENTORY or simply inventory Which is products that a company owns and plans to sell Inventory includes the cost to buy the goods ship them to the store and get them ready for sale Operating cycle for a merchandiser begins by purchasing merchandise and ends by collecting cash from selling the merchandise 0 1 Cash purchases of merchandise 2 Inventory for sale 3 Credit sales 4 Accounts receivable 5 Cash 0000 0 Inventory systems Inventory refers to products a company owns and expects to sell in its normal operations either sold cost of goods sold or kept for future sales ending inventory Two alternative inventory accounting systems perpetual system or periodic system 0 Perpetual inventory system for merchandising transactions specifically for those records of inventory available for sale and inventory sold 0 Periodic inventory system updates the accounting records for merchandise transactions only at the end of an accounting period 0 The cost of merchandise purchased for resale is recorded in the asset account 0 Purchase discounts 0 Credit terms terms of payment and timing between the buyer and seller 0 Example seller requires payment within 10 days after the end of the month 0 N10 net 10 days 0 Credit period the amount of time allowed before full payment is due 0 Cash discount sellers grant this discount to buyers to encourage them to pay earlier 0 Purchase discount the buyer Views this cash discount if they pay prior to the due date as a purchase discount 0 Sales discount how the seller Views the cash discount to the buyer 0 Cash discounts are described in the credit terms 0 Example I10 n60 2 discount if they pay within 10 day full payment due in 60 days 0 45 n30 4 discount if payment is received within 4 days 0 Purchase returns and allowances 0 Purchase returns refer to merchandise a buyer acquires but then returns to the seller Returns are recorded at the net costs charged to buyers 0 Purchase allowance the reduction in the cost of defective or unacceptable merchandise that a buyer acquires Debit memorandum when the buyer returns or takes an allowance on merchandise the buyer issues this debit memorandum to inform the seller of a 0 Note when cash is refunded the cash account is debited instead of accounts payable 0 Transportations costs and ownership transfer 0 FOB shipping pointF OB factory FOB free on board This means the buyer accepts ownership when the goods depart the seller s place of business the buyer is responsible for paying shipping costs and bearing the risk of damage or loss when goods are in transit The goods are now a part of the buyer s inventory since ownership has been transferred FOB destination means ownership of goods transfers to the buyer when the goods arrive at the buyer s place of business The seller is responsible for paying shipping charges and bears the risk of damage or loss in transit The seller doesn t record revenue from this sale until the goods arrive at the destinations because the transactions is not complete Purchases are recorded as to the merchandise inventory Later purchase discounts returns and allowances are to merchandise inventory Sales of merchandise involves revenue received in the form of an asset from the customer and cost recognized for the merchandise sold to the customer 0 Revenue recorded in a debit to accounts receivable and credit to sales 0 Cost for merchandise sold debit to cost of goods sold and credit to merchandise inventory account Sales returns and allowances refers to merchandise that customers return to the seller after a sale 0 Revenue recorded debit to sales returns and allowances and credit to accounts receivable 0 If goods can be resold then record as debit to merchandise inventory and credit to cost of goods sold 0 Allowances debit to sales returns and allowances account and credit to accounts receivable Shrinkage the term used to refer to the loss of inventory Multiple step income statement shows detailed computations of net sales and other costs and expenses It reports subtotals for various items 3 main parts 0 Gross pro t determined by net sales cost of goods sold 0 Income from operations gross profit operating expenses 0 Net income operations adjusted for nonoperating items Operating expenses classified into two sections 0 Selling expenses include the expenses of promoting sales by advertising making sales and delivering goods to customers 0 General and administrative expenses company s overall operations expenses Single step income statement lists cost of goods sold as an expense and shows only one subtotal for totals expenses 0 Ch 5 notes Goods in transit if the ownership has passed to the purchaser the goods are included in the purchaser inventory FOB shipping point If the seller is responsible for paying freight this is FOB destination Goods on Consignment are goods shipped by the owner to another party Goods damaged or obsolete damaged and obsolete are not counted in inventory if they cannot be sold If they can be sold at a reduced price they are included in inventory at an estimate of their NET REALIZABLE VALUE The period when damage occurs is the period when the loss in value is reported Net realizable value is sales price minus the cost of making the sale Determining inventory costs merchandise inventory includes cost of expenditures necessary to bring an item to a salable condition and location Incidental costs must be included and examples are as follows 0 Minus discounts Import tariffs Freight Storage Insurance 0 Costs incurred in an again process Incidental costs must be added to inventory and recorded against revenue in the O O O 0 period when inventory is sold Physical count of inventory taken at least once a year to adjust the inventory account balance due to theft loss damage and errors Accounting for inventory affects both the balance sheet and the income statement We use the expense recognition or matching principle to decide how much of the costs of the goods available for sale is deducted from sales and how much is carried forward as inventory and matched vs future sales 0 Four methods used to assign costs to inventory and to cost of goods sold 0 All methods are acceptable in practice Speci c identi cation When each item in inventory can be identified With a specific purchase and invoice O Advantage exactly matches the cost of items With the revenues they generate First in first out FIFO assumes that inventory items are sold in the order acquired When sales occur the costs of the earliest units acquired are charged to cost of goods sold 0 Advantage assigns an amount to inventory on the balance sheet that approximates its current cost and mimics the actual ow of goods Last in first out LIFO assumes that the most recent purchases are sold first More recent costs are charged to the goods sold and the costs of the earliest purchases are assigned to inventory 0 Advantage assigns an amount to cost of goods sold on the income statement that approximates its current costs and better matches current costs with revenues Weighted average also called average cost requires that we use the average cost per unit of inventory at the end of the period Weighted average cost per unit equals the cost of goods available for sale divided by the units available 0 Advantage tends to smooth out erratic changes in costs 0 First multiply the per unit cost for beginning inventory and each particular purchase by the number of units 0 Add these amounts and divide by the total number of units available for sale weighted average cost per unit 0 Use the weighted average cost per unit to assign costs to inventory Cost regularly rise first in first out assigns the lowest amount to cost of goods sold last in first out assigns the highest amount to cost of goods sold weighted average yields results between FIFO and LIFO Note specific identification always yields results that depend on which units are sold Consistency concept requires that a company use the same accounting methods period after period so that financial statements are comparable across periods Lower of cost or market LCM inventory must be reported at the market value cost of replacing inventory when market value is lower than the cost Inventory must be adjusted downward when market is less than cost Applied in 3 ways as follows 0 LCM applied to individual items the number of comparisons equals the number of items 0 To major categories of items To the whole of inventory 0
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