Chapter 5 Financial Accounting Notes
Chapter 5 Financial Accounting Notes Financial Accounting
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This 16 page Class Notes was uploaded by WhitneyG20 on Friday October 9, 2015. The Class Notes belongs to Financial Accounting at Western Kentucky University taught by Dr. Richard Callahan in Summer 2015. Since its upload, it has received 26 views. For similar materials see Financial Accounting in Accounting at Western Kentucky University.
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Date Created: 10/09/15
ACCT 200 Fall 2015 Chapter Five Merchandising Operations and MultipleStep Income Statement DA Y ONE Overview of Next m Chapter 4 Accrual Accounting Concepts Chapter 5 Merchandising Transactions amp Multiple Step Income statement Chapter 6 Inventory who owns it amp how to calculate cost 0 Cost of winning lnventorv Add Cost of Goods Purchased during the time period 0 Beginning Inventory plus Purchases t of Goods Available to Sell 0 Cost of Goods Available minus Cost of Ending Inventory t of Goods Sold Apples Example Beginning Inventory 1 apple Purchases 5 apples apples Available to Sell 6 apples If Ending Inventory 2 apples Then apples sold 4 apples 6 2 Dollars Example 0 Cost of Beginning Inventory 50000 0 Cost of Purchases 700000 0 Cost of Goods Available to Sell 750000 0 If Ending inventory 100000 0 Then Cost of Goods Sold 650000 750000 100000 0 What would COGS be is ending inventory was zero 750000 750000 0 0 What would COGS be is ending inventory was 200000 550000 750000 200000 Example If Sales Revenue 1000000 Sales Returns 50000 Sales Discounts 30000 then what is the amount for Net Sales Revenue 920000 1000000 50000 30000 Example If cocs 650000 then what is GP answer 270000 920000 650000 Assume a Company purchased 1000 items for 3 each and sold all of them for 5 each 1 What would be total Sales Revenue 5000 1000 X 5 2 What would be Cost of Goods Sold 3000 1000 X 3 3 What would be Gross Profit 2000 5000 3000 Note Company made 2 gross profit on each item sold 0 Why do sellers offer discounts on the selling price To give an incentive for customers to pay early 0 Sales Discount Terms 0 what does each amount represent Example Original sales price 500 on Jan 1 Discount period from Jan 1 thru Jan 11 1 10 days If not paid by Jan 11 then balance due on Jan 31 1 30 days If paid on Jan 11 discount 5 500 X 1 customer only has to pay 495 If paid on Jan 12 no discount customer must has pay full amount 500 T A When is the inventory account adjusted B Cost of the system C Who uses the system D What is recorded at the time of a sale Constantly updated account is adjusted every time there is a sale Can be expensive it requires computers scanners amp software Large companies 1 Sales Revenue 2 Cost of goods sold plus inventory account reduced Only updated at end of accounting period Cheaper alternative don 39t need all of the equipment etc Small companies 1 Sales Revenue only 2 No adjustment of the inventory account until end of accounting period E Is a physical count of inventory needed at the end of the accounting period DA Y TWO I A When is the inventory account adjusted B Cost of the system Yes To see if the perpetual inventory amount is correct if not then must be corrected Constantly updated account is adjusted every time there is a sale Can be expensive it requires computers scanners amp software Yes To determine quantity and cost of ending inventory so that the inventory account can be adjusted Only updated at end of accounting period Cheaper alternative don 39t need all of the equipment etc C Who uses the system D What is recorded at the time of a sale E Is a physical count of inventory needed at the end of the accounting period Large companies 1 Sales Revenue 2 Cost of goods sold plus inventory account reduced Yes To see if the perpetual inventory amount is correct if not then must be corrected Recording Merchandise Sales Transactions Small companies 1 Sales Revenue only 2 No adjustment of the inventory account until end of accounting period Yes To determine quantity and cost of ending inventory so that the inventory account can be adjusted Assume the Seller Co 8 has cash of 15000 and Inventory of 40000 0 Do journal entries for Seller Co 8 example 1 0 Will do the journal entries for Buyer Co B later example 2 0 Transaction 1 Assume Sale for 3000 on credit on Jan 12 from Co 8 to Co B COGS 1950 Record the sales revenue and COGS Assume Discount Terms 210 n30 what does each amount represent 0 2 2 Discount o 10 ten days to make payment to get discount 0 n any balance due after 10 days 0 30 number of days to pay final balance due 0 Transaction 2 Assume on Jan 15 customer Co B returns part of the merchandise to Seller Co S original sales price 200 and cost 130 Record the sales return on Co S s books 0 Transaction 3 Assume the customer Co B pays Seller Co S on Jan 22 is Co B entitled to a discount Answer yes Jan 12 10 days Jan 22 Record the cash collection from customer and the Sales Discount 0 How much is still owed after sales return Answer 2800 3000 200 o How much is the sales discount 56 2800 X 2 How much does Co B pay 2744 2800 56 0 Does much does the Co B owe Co S2 anything after the payment of 2744 No 0 0 Show TAccounts for Seller based on the above 0 Calculate Seller s Gross Profit Net Sales 2744 3000 200 sales returns and 56 sales discounts COGS 1820 1950 130 GP 92427441820 Example 1 Co Seller 3 January GENERAL JOURNAL Transactions Account Titles and Explanation Debit Credit 1 A Accounts Receivable 3000 Sales Revenue 3000 Sale to customer Co B on Jan 12 to record revenue and receivable from Co B 1W 1959 Inventory 1 950 Sale to customer Co B on Jan 12 to record expense and to reduce inventory 2 A Sales Returns Accounts Receivable 200 Co B returned some merchandise on Jan 15 to record contra revenue and to reduce receivable from Co B 200 2 B Inventory 130 Cost of Goods Sold 130 Co B returned some merchandise on Jan 15 to update inventory and to reduce expense 3 Cash 2744 Sales Discounts 56 Accounts Receivable 2800 To record cash received from Co B on Jan 22 to record sales discount and to reduce Co B s receivable note payment falls within the ten day discount period Example 1 Seller S General Ledger amp TAccounts Cash BEG 15000 3 2744 17744 0 END Bal 17744 Inventory BEG 40000 13 1950 ZB 130 40130 1950 END Bal 38180 Accounts Receivable BEG 0 2A 200 1A 3000 3 2800 3000 3000 END Bal 0 Sales Revenue BEG 0 1A 3000 END Bal 3000 Sales Returns BEG 0 ZB 200 END Bal 200 Sales Discounts BEG 0 3 56 END Bal 56 Cost of Goods Sold BEG 0 ZB 130 1 B 1950 END Bal 1820 0 Assume the Buyer Co B has cash of 25000 and Inventory of 30000 0 Do journal entries for Buyer Co B example 2 0 Transaction 1 Assume Purchase for 3000 on credit on Jan 12 by Buyer Co B from Seller Co S Record the purchase on credit 0 Assume Discount Terms 210 n30 what does each amount represent 0 2 2 Discount 0 10 ten days to make payment to get discount 0 n any balance due after 10 days 0 30 number of days to pay final balance due 0 Transaction 2 Assume on Jan 15 Co B returns part of the merchandise to the Seller Co S original sales price 200 Record the purchase return on Co B s books 0 Transaction 3 Assume the Co B pays Seller Co S on Jan 22 is Co B entitled to a discount Answer yes Jan 12 10 days Jan 22 Record the cash collection from customer and the Sales Discount 0 0 How much is still owed after sales return Answer 2800 3000 200 How much is the sales discount 56 2800 X 2 How much does Co B pay 2744 2800 56 Does much does the Co B owe Co S2 anything after the payment of 2744 No 0 Show TAccounts for Buyer based on the above Now record the transactions for Co B the Buyer haw January GENERAL JOURNAL Transactions Account Titles and Explanation Debit Credit 1 Inventory 3000 Accounts Payable 3000 New merchandise purchased on account on Jan 12 2 Accounts Payable 200 Inventory 200 Co B returned some merchandise on Jan 15 to record reductions in accounts payable and inventory 3 Accounts Payable 2800 Cash 2744 Inventory 56 To record cash paid to Co 8 on Jan 22 Example 2 Buyer Co B General Ledger amp TAccounts Cash BEG 25000 3 2744 25000 2744 END Bal 22256 Inventory BEG 30000 2 200 1 3000 3 56 3000 amp END Bal 32744 Accounts Payable 2 200 BEG 0 3 2800 1 3000 3000 3000 END Bal o DA Y THREE 7 Six Categories of Revenues or Expenses Service Co 3 steps or subtotals Merchandise Co 4 steps or subtotals VVVV This format separates operating revenue and operating expenses from other types of revenue and expenses 1 gt primary source of revenue service co service revenue merchandise co sales revenue 2 gt secondary sources of revenue examples Interest Revenue Gain on Sale of Land 3 for Merchandise companies only 4 gt Selling General and Administrative Expenses SG amp A 0 all of the expenses associated with selling the merchandise from the solicitation of the sale until the product is in the hands of the buyer such as advertising marketing etc expenses relating to general operating activities such as wages of most employees rent utilities insurance etc expenses for management of the company such as executive salaries human resources accounting clerical security etc 5 gt Expenses not included in SG amp A examples Interest Expense Loss on Sale of Land 6 8 A one step is required in determining net incomesubtract total from total 0 includes both operating revenues and nonoperating revenues 0 includes operating expenses as well as nonoperating expenses B 0 O Gross profit IF C0 sells a product Gross profit is the merchandising profit of the company Net Sales minus Cost of goods sold COGS is the cost of the merchandise sold during the period Income from Operations subtract operating expenses only form the primary sources of revenue 0 If this is a C0 that sells a product then Operating expenses are subtracted from gross profit in order to determine income from operations and this is second step for a product Co 0 if this is a Service Co then Operating Expenses are subtracted from Service Revenue in order to determine income from operations and this is first step for a Service Business Operating expenses include 8 G amp A AddSubtract incomeeXDenses from NonOperating activities unrelated to company s primary line of operations from income from Operations or other revenues and gains ML sources of Revenue 0 or other expenses and losses Expenses not considered to be part of primary operating activities Subtract Income Taxes from Income before Income Taxes Revenues Service Revenue Interest Revenue Total Revenues Expenses Operating Expenses Income Tax Expense Loss on Sale of Equipment Total Expenses One Step Net income 500000 4000 504000 300000 60000 10000 370000 134000 Service Company Income Statement Year Ended December 31 2012 Service Revenue Less Operating Expenses Income from Operations Add Interest Revenue Less Loss on Sale of Equipment Income before Income Tax Less Income Tax Expense Net income 500000 300000 200000 4000 10000 194000 60000 134000 Step 1 Step 2 Step 3 Merchandise Company Income Statement Year Ended December 31 2012 Revenues Net Sales Revenue 685000 Net Sales Revenue 685000 Gain on Sale of Equipment 2000 Less Cost of Goods Sold 400000 Total Revenues 687000 Gross Pro t 285000 Step 1 Less Operating Expenses 200000 Expenses Income from Cost of Goods Sold 400000 Operations 85000 Step 2 Operating Expenses 200000 Add Gain on Sale of Income Tax Expense 24000 Equipment 2000 Interest Expense 8000 Less Interest Expense 24000 Total Expenses 632000 Income before Income Tax 63000 Step 3 Net income 55000 WalMart versus Target WaIMart versus Target From 2014 Annual Reports Net Sales Revenue Less Cost of Goods Sold Gross Pro t Less Operating Expenses Income from Operations Add NonOperating Revenue Less Interest Expense Less Income Tax Expense Net income WaI Wal Mart Mart Target Target amoun amoun ts in of ts in of millions Net millions Net Sales Sales 4730 10000 7261 10000 76 8 35806 9 7569 51278 7061 11500 7 2431 21340 2939 91353 1931 16805 2314 23654 500 4535 625 3218 068 0 000 2216 047 882 121 8000 55000 Step 4 Income before Income Tax 24656 521 3653 503 Less Income Tax Expense 8105 171 1204 166 1655 Net income 1 350 2449 337 1 How does WalMart s Gross Profit 2431 compare to Target s Gross Profit 2939 Answer Target s GP is higher than WalMart Indicates that Target s sales prices are higher Note WalMart is known for lower prices 2 How does WalMart s Operating Expenses 1931 compare to Target s Operating Expenses 2314 Answer Target spends more on its stores operating expenses than WalMart does Note Target stores nicer than WalMart stores 3 What other income does WalMart have that Target does not have Answer Membership fees for Sam s Club etc 4 How does WalMart s Interest Expense 047 compare to Target s Interest Expense 121 Answer Indicates that Target has more borrowed money on a basis than WalMart 5 How does WalMart Income Tax Expense 171 compare to Target s Interest Expense 166 Answer Income Taxes as a percent of Net Sales Revenue are similar for both 6 How does WalMart s Net Income 350 compare to Target s Net Income 337 Answer Net Incomes as a percent of Net Sales Revenue are similar for both The two companies operate differently in some ways but have similar bottom lines Introduce Chapter 6 on Inventories if time remaining
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