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Chapter 5 Notes

by: Amelia Cassidy

Chapter 5 Notes BA 210

Amelia Cassidy

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About this Document

These notes cover chapter 5, as covered in the class lecture and textbook
Financial Accounting
Dr. Greenman
Class Notes
business, Accounting, financial accounting
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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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