ACCN 2010 Chapter 5 Notes
ACCN 2010 Chapter 5 Notes ACCN 2010
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This 4 page Class Notes was uploaded by Tara Watkins on Sunday February 21, 2016. The Class Notes belongs to ACCN 2010 at Tulane University taught by Christine Smith in Spring 2016. Since its upload, it has received 44 views. For similar materials see Financial Accounting in Accounting at Tulane University.
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Date Created: 02/21/16
Accounting 2010 Chapter 5 Notes Merchandisers are entities that buy/sell merchandise to earn a profit instead of performing services to earn a profit. o Types of merchandisers: Wholesalers – sell to retailers Retailers – sell to consumers So in order, it’s Wholesalers - > Retailers - > Consumers A merchandiser’s main revenue source is sales revenue (selling products to either a retailer or consumer). Two types of expenses are incurred by merchandisers: o Cost of Goods Sold o Operating Expenses Entities want the operating cycle to occur as often as possible because if it doesn’t: o Products in their inventory could become obsolete (ex. outdated iPhones, winter clothing in the summer, clothes that have gone out of style). o Their investments (assets) are tied up and cannot raise revenue (ex. having $1,000 worth of products in a stockroom is an unused potential economic benefit but they cannot earn a profit until they are sold). Companies can choose to use one of two inventory systems: o Perpetual inventory system Records every sale. Always have access to the amount of inventory that should be available for sale (may not be 100% accurate due to theft (theft is also called shrinkage)). Taking a physical count of the inventory and comparing it to what the system says should be on hand will reveal if shrinkage has occurred. Cost of Goods Sold is determined when each sales happens. Commonly used. More expensive than the periodic system because of the computer systems necessary. o Periodic inventory system Records the amount of inventory at the beginning of the period. Determines the Cost of Goods Sold (COGS) at the end of the period. COGS = Beginning inventory + net purchases – ending inventory More common in small businesses because it’s cheaper and their inventory is small enough to manage without constant monitoring. Multi-step income statement o Used to calculate Key Performance Indicators (KPI) which are intermediary measures of success. o KPIs are: Gross Profit (Gross Profit = Net Sales - Cost of Goods Sold) Operating Income (Operating Income = Gross Profit – Operating Expenses) Net Income (Net Income = Operating income + sum of all non-operating revenues/expenses) o Gross Profit rate = gross profit ÷ net sales Ex. 3,000 ÷ 9,000 = 33.3% This is useful because it shows the relationship between gross profit and net sales. The greater the rate, the profitable the company is. o Example format: Revenue: Merchandise Sales $ 10,000 Sales Discounts < 500 > Sales Returns and Allowances < 750 > Net Sales 8,750 Cost of Goods Sold < 5,500 > Gross Profit 3,250 Operating Expenses < 900 > Operating Income 2,350 Other Revenues and Expenses (can be + or -) 650 Income Before Income Taxes 3,000 Income Tax Expense < 800 > Net Income $ 2,200 Freight Costs o FOB stands for Free on Board. o FOB shipping point – buyer pays the freight costs because ownership transfers when the goods are passed to the shipping carrier. o FOB destination – seller pays the freight costs because ownership transfers when the goods are delivered to the buyer. o When the buyer pays freight costs, inventory is increased because the cost of inventory includes all costs to get the items to their final destination for sale. o When the seller pays freight costs, an expense account called Freight-Out is increased. Purchase Returns and Allowances o Purchase return – when a buyer sends damaged or unsatisfactory goods back to the seller for a refund or credit. Buyer would decrease inventory (credit) and decrease accounts payable (debit). o Purchase allowance – when a seller reduces the price of an unsatisfactory good and the buyer keeps the item. Purchase discounts o Ignore trade discounts (ex. an item listed at $100 but advertised on sale for $50). o Pay attention to cash discounts which are listed on invoices. Ex. 2/10, n/60 – this means that if you pay within 10 days, you receive a 2% discount. If you pay after the 10 day period is over, you owe the full amount within 60 days. If the full amount was $1,000 and you paid it within the first 10 days, you would only pay $980. But if you paid it after the 10 days were over, you would pay $1,000. This is recorded by the buyer as: $1,000 debit to Accounts Payable $980 credit to Cash $20 credit to Inventory Sales Returns and Allowances o Sales Returns and Allowances and Sales Discounts are contra-revenue accounts for Sales Revenue. o Sales return - when a seller receives damaged or unsatisfactory goods from a buyer for a refund or credit. Seller would increase Sales Returns and Allowances (debit) and decrease accounts receivable (credit). Seller would also increase inventory (debit) and decrease Cost of Goods Sold (credit). o Sales allowance - when the buyer keeps the unsatisfactory good but the seller reduces the price of the item. Seller would increase Sales Returns and Allowances (debit) and decrease accounts receivable (credit). Sales Discounts o Same as purchase discounts (the difference is that sales discount is the name used by the seller instead of the buyer). Ex. 2/10, n/60 – this means that if the customer pays within 10 days, they receive a 2% discount. If they pay after the 10 day period is over, they owe the full amount within 60 days. If the full amount was $1,000 and they paid it within the first 10 days, they would only pay $980. But if they paid it after the 10 days were over, they would pay $1,000. This is recorded by the seller as: $980 debit to Cash $20 debit to Sales Discounts $1,000 credit to Accounts Receivable In periodic inventory systems, entries are slightly different than in the perpetual inventory system. o For buyers: When purchases are made, instead of debiting the Inventory account, an account named Purchases is debited. When freight costs are incurred, instead of debiting the Inventory account, an account named Freight-In is debited. When purchases are returned or allowances are granted, instead of crediting the Inventory account, an account named Purchase Returns and Allowances is credited. When a purchase discount is offered and taken, instead of crediting the Inventory account, an account named Purchase Discounts is credited. o For sellers: When sales are made, only an entry debiting Accounts Receivable and crediting Sales Revenue is recorded. When sales are returned or allowances are granted, only an entry debiting Sales Returns and Allowances and crediting Accounts Receivable is recorded. When a sales discount is offered and taken, Cash and Sales Discounts are still debited and Accounts Receivable is still credited.
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