Accounting exam 2 chapter 6

Purchases (P)

Cost of new purchases is added to the cost of beginning inventory

$10,500 of Bikes owed to supplier remains in Accounts Payable until it is paid then....

Debit: Account Payable Credit: Cash

Assume Walmart returned some of bikes to the supplier and received a $500 reduction in the balance owed

Debit: Accounts Payable -500 Credit: Inventory -500

Suppose Walmart's warehouse store Sam's Club sells printer paper on account to a local business for $1000 with payment terms 2/10, n/30. The paper has cost Sam's Club $700

Debit: Accounts Receivable $1000 Credit: Sales Revenue $1000 Debit: CGS (+E) -700 Credit: Inventory -700

Suppose Walmart's warehouse store Sam's Club sells printer paper on account to a local business for $1000 with payment terms 2/10, n/3 and the customer does NOT pay within 10 days

Debit: Cash $1000 Credit: Account Receivables -$1000

When Walmart receives the inventory and is invoiced for it Example: Receives $10,500 of bikes purchased on account

Debit: Inventory Credit: Account Payable

Assume Walmart pays $400 cash to a trucker who delivers the $10,500 of bikes to one of its stores.

Debit: Inventory 400 Credit: Cash -400

A sales allowance (a reduction in sales without the return of goods) is accounted by

Debit: Sales Returns & Allowances (+xR) Credit: Cash

A sales return that results in issuing store credit rather than a cash refund is accounted for by

Debit: Sales Returns & Allowances (+xR) Credit: Unearned Revenue Debit: Inventory Credit: CGS

Assume that after Walmart sold the two bikes, the customer returned one to walmart. Assuming the bike is still like new, Walmart would refund the $200 selling price and take the bike back into inventory at its cost of $175

Debit: Sales Returns & Allowances (+xR) -$200 Credit: Cash -$200 Debit: Inventory $175 Credit: Cost of Goods Sold (CGS) $175

Ending Inventory (EI)

Goods available for sale remain on hand, reported on the balance sheet

Cost of Goods Sold (CGS)

Goods available for sale will be sold and reported during the period on the income statement

n/30

If payment is not made within the 10-day discount period, the full amount will be due 30 days after ownership transferred

2/10

If the purchaser pays by the 10th day of taking ownership of the goods, a 2 percent purchase discount can be deducted from the amount owed

Purchase Order

Instructs the supplier to send specified quantities of particular products on certain dates

Reports the merchandiser's total cost of acquiring goods that it has not yet sold

Inventory

Gross profit is not directly recorded in an account by itself but instead...

Is a subtotal produced by subtracting CGS - Sales Revenue on the income statement

Allowance

Keep damaged or failed to meet specifications and ask for a cost reduction

Revenue Recognition Principle

Merchandisers record revenue when they fulfill their performance obligations by transferring control of the goods to customers

Gross Profit Percentage

Net sales - CGS x 100 ________________________ Net Sales -The percentage of profit earned on each dollar of sales, after considering the cost of products sold -A higher ratio means that the company is selling products for a greater markup over its cost

When exchanged only promises...

No journal entry is made

Sales Returns and Allowances

Reduction of sales revenues for return of or allowances for unsatisfactory goods

Indicate the total selling price and cost of all goods that the merchandiser did sell to customers during the period

Sales Revenue and Cost of Goods Sold

Retailers

Sell directly to individual consumers

wholesalers

Sell their inventory to retail businesses for resale to consumers

Comparative Format

Showing results for more than one year

Inventory

Tangible property held for sale in the normal course of business or used in producing foods or services for sale

(BI + P) represents

The Cost of Goods Available for Sale

Recording Inventory Sales: Wholesale Merchandiser

The Transfer of control occurs at a time stated in the written sales agreement

Merchandise Sale: Cost

The cost that Walmart incurred to initially buy the march Debit: Cost of Goods Sold (CGS) Credit: Inventory

Recording Inventory Sales: FOB Shipping Point

The sale is recorded when the goods leave the seller's shipping department

Recording Inventory Sales: FOB Destination

The sale is recorded when the goods reach their destination (the customer)

Suppose Walmart's warehouse store Sam's Club sells printer paper on account to a local business for $1000 with payment terms 2/10, n/3 and the customer pays within 10 days

The sales discount will be $20 (2% x $1,000) Debit: Cash $980 Debit: Sales Discount (+xR) -$20 Credit: Accounts Receivable -$1000

The Cost of Goods Available for Sale

The sum of beginning inventory and purchases for the period

Recording Inventory Sales: Retail Merchandiser

This transfer occurs when a customer buys and takes possession of the goods at checkout

Merchandise Sale: Selling Price

Walmart Sales price recorded Debit: Cash / Accounts receivable Credit: Sales Revenue

Assume Walmart sells two bikes at a selling price of $200 per bike totaling $400 cash, The bikes had been recorded in Inventory as $175 per bike totaling $350

a) Debit: Cash $400 Credit: Sales Revenue $400 b) Debit: Cost of Goods Sold (CGS) $350 Credit: Inventory -$350 ($50 difference is gross profit)

Income from Operations

- A measure of the company's income from regular operating activities, before considering the effects of interest, income taxes, and any nonrecurring items -Selling, General, and Administrative Expenses subtracted by gross profit

Assuming Walmart now owes the supplier only $10,000 for the purchase and pays with 10 days (2/10, n/30)

- Walmart's purchase discount is $200 (2% x $10,000) Debit: Account Payable -10,000 Credit: Cash -9,800 Credit: Inventory -200

Merchandising Companies

-A company that sells goods that have been obtained from a supplier -buying product, inventory sold to customers, collecting cash that is used for operating expenses and to buy more inventory -Example: Walmart or Costco

Service Companies

-A company that sells services rather than physical goods -Sell services to customers, collect cash from them, and use that money to pay for operating expenses -Example: Life Time Fitness

Inventory Controls

-A perpetual inventory system provides the best inventory control from continuous tracking -Better managing of companies inventory -Allows managers to estimate shrinkage

Purchase Returns and Allowances

-A reduction in the cost of purchases associated with unsatisfactory goods -Accounted for by reducing the cost of the inventory and either recording a cash fund or reducing the liability owed to the supplier

Financial Reporting for Service Companies

-Balance sheet: Supplies -Income Statement: Service Revenue

Financial Reporting for Merchandising Companies

-Balance: Inventory -Income Statement: Sales Revenue, net and costs of goods sold

Purchase Discount

-Cash Discount received for prompt payment of an account - 2/10, n/30

Accumulate Depreciation

-Contra-asset -Reduces the total in an asset account such as Equipment

Cost of Goods Sold (CGS) Equation

-Expresses the relationship between inventory on hand, purchased, and sold - BI + P - EI = CGS - BI + P - CGS = EI

book-to-physical adjustment

-Reduces inventory -Increases Cost of Goods Sold

Multistep Income Statement

-Reports alternative measures of income by calculating subtotals for core and peripheral business activities -Separates the revenues and expenses that relate to core operations from all the other items that affect net income

Contra-Revenue Account

-Sales Returns and Allowances -Sales Discount -Reduces the total in a revenue account such as Sales Revenue -Used so Walmart can track the value of goods returned

Gross Profit

-Subtracting Cost of Goods Sold from Sales Revenues -The profit earned before taking into account other expenses such as salaries, wages, and depreciation

FOB Destination

-Term of sale indicating that good are owned by the seller until delivered to the buyer -Ownership transfers at the distinction, so the supplier incurs the transportation cost

FOB Shipping Point

-Terms of sale indication that goods are owned by the buyer the moment they leave the seller's premises -Ownership of the goods transfer to Walmart at the shipping point, so Walmart pays for transportation cost (freight-in)

Shrinkage

-The cost / loss of inventory lost to theft, fraud, and error -Calculated by subtracting the cost of inventory counted from the that recorded in the perpetual inventory system

Freight-In

-Transportation Cost -Recorded as an addition to Walmart's Inventory account bc it is a cost Walmart incurs to obtain the inventory

Freight-out

-Transporting costs -Delivering goods to customers -should be treated as selling expenses

Perpetual Inventory System

-Updates inventory records every time an item is bought, sold, or returned -Uses BI + P - CGS = EI

Periodic Inventory System

-Updates the inventory records for merchandises purchases, sales, and returns only at the end of the accounting period -Uses BI + P - EI = CGS equation -Drawback: accurate records of the inventory on hand and the inventory that has been sold are unavailable during the accounting period

Gross Profit Percentage can be used to

1) Analyze changes in the company's operations over time 2) Compare one company to another 3) Determine whether a company is earning enough on each sale to cover it's operating expenses

When a sales discount is offered to ad later taken by the customer, the seller accounts for two transactions

1) The initial sale 2) The sales discount taken by the customer

Good purchased from a supplier arrive in damaged condition or fail to meet specifications, the buyer can...

1. Return them for a full refund 2. Keep them and ask for a cost reduction (an allowance)

When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory the customer can...

1. Return them for a full refund 2. Keep them and ask for a reduction in the selling price (allowance)

Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system:

1. Selling Price 2. Cost

Bar-code Readers

1. They calculate and record the sales revenue for each product you're buying 2. They remove the product and its cost from Walmart's inventory records

Operating Cycles

A series of activities that a company undertakes to generate revenues and, ultimately cash The operating cycle of a merchandising company ordinarily is longer than that of a service company

Beginning Inventory (BI)

A stock of inventory at beginning of accounting period

Selling, General, and Administrative Expenses includes

A variety of operating expenses such as salaries and wages, utilities, advertising, rent, and the costs of delivering merchandise to customers