Accounting Ch 5
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This 6 page Class Notes was uploaded by Alikhan Ladhani on Sunday February 21, 2016. The Class Notes belongs to ACCT 2101 at Georgia State University taught by Kris J. Clark in Spring 2016. Since its upload, it has received 47 views.
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Date Created: 02/21/16
CH 5 MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT 2/21/16 11:23 PM 5.1 Merchandising operations • merchandising companies buy and sell merchandise rather than perform services as primary source of rev. example of some are REI, Wal-Mart and amazon • retailers-merchanidsing companies that purchase and sell directly to consumers • Wholesalers- merchandising companies that sell directly to retailers • Sales revenue or sales- prim source of rev. for merchandising companies • Cost of goods sold- total cost of merchandise sold during the period • Sales Revenue – Cost of Goods Sold = Gross Profit – Operating Expenses = Net Income (loss) • Operating Cycles • Operating cycles of merchandising company is longer than service company o Service company § Perform service -> accounts receivable-> receive cash in mail o Merchandising company § Buy inventory-> sell inventory-> accounts recevable -> receive cash • Flow of costs • Perpetual system o companies maintain detailed records of the cost of each inventory purchase and sale § shows what inventory is on hand o Under a perpetual inventory system, a company determines the cost of goods sold each time a sale occurs • Periodic system • They determine the cost of goods sold only at the end of the accounting period—that is, periodically At that point, the company takes a physical inventory count to determine the cost of goods on hand. • To determin the cost of the goods sold steps are needed o 1. Determine the cost of goods on hand at the beginning of the accounting period o 2. Add to it the cost of goods purchased o 3. Subtract the cost of goods on hand at the end of the accounting period 5.2 Recording Purchases of Merchandise • Every purchase should be supported by business documents that provide written evidence of the transaction. • Purchases must be supported by a purchase invoice - indicates the total purchase price and other relevant information. • Freight cost • FOB- Free on board • FOB shipping point- means that the seller places the goods free on board the carrier ant he buyer pays the freight costs • FOB destination- the seller places the goods free on board to the buyers place of business and the seller pays the freight • Freight costs incurred by buyer o Buyer pays for transport then the cost are considered part of the cost of purchasing inventory § So the account inventory is increased (debited) • Freight costs incurred by seller o freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller o when seller pays for freight charges then the seller will usually establish a higher invoice price for the goods to cover the expense of shipping • Purchase returns and Allowances • Purchase return- a return of goods from the buyer to the seller for cash or credit • Purchase allowance- A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise. • Purchase Discoutns • Purchase discount- cash discount claimed by a buyer for prompt payment of a balance due o This is good for both the buyer and the seller o Purchaser saves money and the seller is able to shorten the operating cycle by converting the accounts receivable into cash earlier • Credit terms- specify the amount of the cash discount and time period which is offered also indicate the length of time in which the purchaser is expected to pay in full of the invoice price • on sales invoice credit terms are 2/10, n/30 “two- ten, net thirty” means that 2% cash discount may be taken if payment is made within 10 days of the invoice date (discount period) o another example 1/10 EOM (end of month) means that 1% discount is available if the invoice is paid within the first 10 days of the next month o when sellers don’t offer discount it will specify the max time period of paying the balance. n/30, n/60, or n/10 EOM means that the buyer must pay the net amount in 30 days, 60 days, or within the first 10 days of the next month. • The term net in “net 30” means the remaining amount due after subtracting any returns and allowances and partial payments 5.3 Recording Sales of Merchandise • revenue is recognized when the performance obligation is satisfied • sales may be made on credit or cash and should be supported by a business document- provides written evidence of the sale • cash register documents- provide evidence of cash sales • sales invoice- provides support for each sales • invoice shows the date of sale, customer name, total sales price, and other relevant information • for internal decision making purposes, companies may use more than one sales account • for example separate sales account for sales of tv, dvds, and microwave oven • on income statement presented to outside investor a merchandising company would normally provide only a single sales figure • reasons o providing detail on all of its individual sales accounts would add considerable length to its income statement o companies do not want their competitors to know the details of their operating results. • The merchandiser credits the Sales Revenue account only for sales of goods held for resale. Sales of assets not held for resale, such as equipment or land, are credited directly to the asset account. • Sales Returns and Allowances • Sales returns and allowances- transactions where the seller either accepts goods back from a purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods • Contra revenue account- An account that is offset against a revenue account on the income statement. o Companies use this to disclose in the accounts and in the income statement the amount of sales returns and allowances. o Important to management • Sales Discounts • Sales discount- A reduction given by a seller for prompt payment of a credit sale. 5.4 Income Statemtns Presentation • single step income statemtn- only one step, subtracting total expenses from total revenues, is required in determining net income (or net loss) • all data is classified as.. o revenues- include both operating revenues and nonoperating revenues and gains (for example, interest revenue and gain on sale of equipment); o expenses- include cost of goods sold, operating expenses, and nonoperating expenses and losses (for example, interest expense, loss on sale of equipment, or income tax expense). • Reason for single step o A company does not realize any type of profit or income until total revenues exceed total expenses, so it makes sense to divide the statement into these two categories. o The form is simple and easy to read. • multiple-step income statement is often considered more useful because it highlights the components of net income • three important line items o 1. Subtract cost of goods sold from net sales to determine gross profit o 2. Deduct operating expenses from gross profit to determine income from opertations o 3. Add or subtract the results of activities not related to operations to determine net income • Sales Revenues • Net sales- Sales less sales returns and allowances and sales discounts. • Gross Profit • Gross profit- excess of net sales over cost of goods sold • Gross profit represents the merchandising profit of company but it is not the measure of the overall profit of a company because expenses have not been deducted • Gross profit also referred to as gross margin • Income from operations= gross profit – operating expense • Nonoperating Activites • Nonoperating activities consist of various revenues and expenses and gains and losses that are unrelated to the company's main line of operation • When nonoperating items are included, the label “Income from operations” (or “Operating income”) precedes them to identify companies normal opertions • nonoperating activities are shown in the categories “Other revenues and gains” and “Other expenses and losses.” • • company using a perpetual system makes an entry to record cost of goods sold and to reduce inventory each time a sale is made. • A company using a periodic system does not determine cost of goods sold until the end of the period • beginning inventory + cost of goods purchased = cost of goods available for sale – ending inventory= cost of goods sold 5.5 Evaluating Profitability • Gross profit / net sales = gross profit % profit margin- measures the percentage of each dollar of sales that results in net income
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