Chapter 5 Notes
Chapter 5 Notes BA 210
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This 9 page Class Notes was uploaded by Amelia Cassidy on Tuesday March 1, 2016. The Class Notes belongs to BA 210 at Embry-Riddle Aeronautical University - Daytona Beach taught by Dr. Greenman in Spring 2016. Since its upload, it has received 26 views. For similar materials see Financial Accounting in Business at Embry-Riddle Aeronautical University - Daytona Beach.
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Date Created: 03/01/16
Chapter 5 Accounting for Merchandising Operations ● Merchandising Operations ○ Retailers Definition ■ Merchandising companies that purchase and sell directly to consumers ○ Wholesalers Definition ■ Merchandising companies that sell to retailers ○ Sales Revenue Definition ■ The primary source of revenue for merchandising companies ○ Cost of Goods Sold Definition ■ The total cost of merchandise sold during the period ○ Operating Cycles ■ Operating cycle of merchandising company is longer than that of service company ○ Flow of Costs ■ Beginning inventory + cost of goods purchased = cost of goods available for sale ■ Perpetual System ● Perpetual Inventory System Definition ○ Inventory system where company keeps detailed records of cost of each inventory purchase/sale records continuously show inventory that should be on hand ● Company determines cost of goods each time a sale occurs ■ Periodic System ● Periodic Inventory System Definition ○ Company does not keep detailed inventory records throughout accounting period but determines cost of goods sold only at end of accounting period ● Determining cost of goods sold in period: ○ Determine cost of goods on hand at beginning of accounting period ○ Add it to cost of goods purchased ○ Subtract cost of goods on hand at end of accounting period ■ Additional Considerations ● Perpetual system has better control over inventories ● Companies that sell high value merchandise use perpetual systems ● Recording Purchases of Merchandise ○ Purchase Invoice Definition ■ A document that supports each credit purchase ■ Indicates total purchase price/other relevant info ○ Freight Costs ■ FOB = Free on Board ■ FOB Shipping Point Definition ● The seller places goods free on board the carrier, buyer pays freight costs ■ FOB Destination Definition ● Seller places goods FOB to buyer’s place of business AND pays freight ■ Freight Costs Incurred by the Buyer ● Transportation costs part of purchasing inventory ○ Debits account inventory ■ Freight Costs Incurred by the Seller ● Incurred freight costs on outgoing merchandise are an operating expense to seller ● Usually establish higher invoice price for goods to cover shipping expense ○ Purchase Returns and Allowances ■ Purchase Return Definition ● Return of goods from the buyer to the seller for a cash or credit refund ■ Purchase Allowance Definition ● Deduction made to the selling price of merchandise, granted by the seller so the buyer will keep the merchandise ○ Purchase Discounts ■ Purchase Discount Definition ● Cash discount claimed by a buyer for prompt payment of a balance due ■ Credit terms specify amount of the cash discount/time period in which it is offered ● Indicate time in which purchaser is expected to pay full invoice price ■ Discount Period = 10 days of invoice date ■ Paying Interest for use of money = passing up discount ○ Summary of Purchasing Transactions ● Recording Sales of Merchandise ○ Business Document should support every sales transaction to provide written evidence of sale ○ Cash Register Tape provide evidence of cash sales ○ Sales Invoice Definition ■ Document that supports each credit sale ○ First Entry Records Sale Seller increases/debits Cash, increases/credits Revenue ○ Second Entry Records Cost of Merchandise Sold Seller increases/debits Cost of Goods Sold, decreases/credits Inventory for cost of goods ● Sales Returns and Allowances ○ Sales Returns and Allowances Definition ■ Purchase returns/allowances from the seller’s perspective ○ ContraRevenue Account Definition ■ An offset against a revenue account on the income statement ● Sales Discounts ○ Sales Discount Definition ■ Reduction given by a seller from prompt payment of a credit sale ○ Sales Discounts is a contrarevenue account to Sales Revenue ■ Normal balance is a debit ● Completing the Accounting Cycle ○ Adjusting Entries ■ At end of each period, merchandising company that uses a perpetual system will take a physical count of goods on hand ■ Adjusting Inventory and Cost of Goods Sold ○ Closing Entries ■ Easiest way to prepare first two closing entries is to Identify temporary accounts by balances then Prepare one entry for credits & one for debits ○ Summary of Merchandising Entries ● Forms of Financial Statements ○ MultipleStep Income Statement ■ MultipleStep Income Statement Definition ● Income statement that shows several steps in determining net income ● Distinguishes between operating and nonoperating activities ○ Income Statement Presentation of Sales ■ Multiplestep income statement begins by presenting Sales Revenue ■ Net Sales Definition ● Sales less sales returns and allowances and less sales discounts ■ Gross Profit ● Gross Profit Definition ○ Excess of net sales over the cost of goods sold ● Gross Profit Rate Definition ○ Gross profit expressed as a percentage by dividing the amount of gross profit by net sales ● Gross profit rate is more useful than gross profit amount ○ Represents merchandising profit of a company ■ Operating Expenses and Net Income ● Operating Expenses Definition ○ Expenses incurred in the process of earning sales revenues ● Nonoperating Activities Definition ○ Various revenues, expenses, gains, and losses that are unrelated to a company’s main line of operations ● “Income From Operations” Definition ○ Income from a company’s principal operating activity; determined by subtracting cost of goods sold and operating expenses from net sales ● Other Revenues and Gains Definition ○ Nonoperatingactivities of the income statement that shows revenues and gains unrelated to the company’s main line of operations ● Other Expenses and Losses Definition ○ Nonoperatingactivities of the income statement that shows expenses and losses unrelated to the company’s main line of operations ○ SingleStep Income Statement ■ SingleStep Income Statement Definition ● Income statement that shows only one step in determining net income ■ Revenues include operating revenues, other revenues, gains ■ Expenses include cost of goods sold, operating expenses, other expense and losses ○ Classified Balance Sheet
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