Ch. 6 (Merchandising Operations & The Multistep Income Statement)

Every merchandise sale has 2 components, each of which require an entry in the ___________ inventory system. List these components.

Every merchandise sale has 2 components, each of which require an entry in the PERPETUAL inventory system. (1) Selling Price (recorded as an increase in Sales Revenue and a corresponding increase in either Cash or Accounts Receivable) (2) Cost (the cost the company incurred to initially buy the merchandise is removed from Inventory and recorded as an expense called COGS)

Analyzing sales transactions under perpetual inventory systems

In a perpetual inventory system, two entries are made every time inventory is sold: (1) records the sale (and corresponding debit to cash or acct. receivable) (2) records the COGS (and corresponding credit to inventory)

Periodic Inventory System

Inventory records are updated "periodically", at the end of the accounting period. To determine how much merchandise has been sold, periodic systems require that inventory be physically counted at the end of the period.

Perpetual Inventory System

Inventory records are updated "perpetually", every time inventory is bought, sold, or returned. Always up to date Provides the best inventory control because of its continuous tracking of transactions allows companies to instantly determine the quantity of products on the shelves & to evaluate the amount of time they have spent there.

Gross profit (also called [gross] margin)

Net Sales - COGS It is a TOTAL, NOT AN ACCOUNT

Multistep Income Statement

Presents important subtotals, such as gross profit, to help distinguish core operating results from other, less significant items that affect net income.

Sales Returns & Allowances

Refunds & price reductions given to customers after goods have been sold and found unsatisfactory. Using this contra-revenue account instead of directly reducing the sales account allows companies to rack the value of goods returned.

Gross profit

Sales Revenue - COGS = Gross Profit Represents the profit earned before taking into account other expenses such as salaries, wages, depreciation, and so on.

Explain the difference between Sales Revenue and Net Sales.

Sales Revenue represents the total selling price of all goods sold to customers. Net Sales represents the company's sales revenue after deducting sales returns and allowances and sales discounts (which are recorded in contra-revenue accounts).

Merchandising Company

Sells goods that have been obtained from a supplier. Buy inventory --> sell inventory --> collect cash

Service Company

Sells services rather than physical goods. Sell services --> collect cash

The operating cycle

Series of activities that a company undertakes to generate revenues, and ultimately, cash.

Three key differences in the balance sheet and income statement of a service company and a merchandising company

The balance sheet excerpts show that (1)merchandisers report Inventory as a current asset, but service companies do not. Service companies often report Supplies, but they differ from inventory because **supplies are goods acquired for internal use. Inventory consists of goods acquired for resale to customers.** The income statement excerpts show that (2) service companies earn revenue from services whereas merchandisers earn revenue from sales (3) Merchandisers report an expense called COST OF GOODS SOLD, which represents the total cost of all goods sold to customers during the period. Service companies do not incur this expense because they do not sell goods.

The cost of inventory includes...

The cost of inventory includes its purchase price and transportation (freight-in) minus cost reductions for purchase returns/allowances, purchase discounts, and goods sold. Costs to deliver inventory to customers (freight-out) are a SELLING EXPENSE and are not included in inventory.

Shrinkage

The cost of inventory lost to theft, fraud, and error. BI + P - COGS = EI

2/10, n/30

pg. 260 Purchase Discounts 2/10: means that if the purchaser pays by the 10th day of taking ownership of the goods, a 2% purchase discount can be deducted from the amount owed. n/30: means that if a payment is not made within the 10-day discount period, the full amount will be due 30 days after ownership transferred.

Inventory account

reports the total COST of acquiring goods that it has not yet sold

Sales Revenue & COGS accounts indicate..

sales REvenue and COGS indicate the total SELLING PRICE and COST of all goods that the merchandiser did sell to customers during the period.

Three accounts particularly important to merchandisers

(1) Inventory (2) Sales Revenue (3) Cost of Goods Sold

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

(1) Return them for a full refund (2) Keep them and ask for a cost reduction, called ALLOWANCE.

Purchase Discount

A cash discount received for prompt payment on account.

Gross profit percentage

A ratio indicating the percentage of profit earned on each dollar of sales, after considering the cost of products sold = [(Net Sales - COGS)/Net Sales] x 100 Higher ratio = greater profit is available to cover operating & other expenses

Purchase Returns & Allowances

A reduction in the cost of inventory purchases associated with unsatisfactory goods.

Sales Discount

A sales price reduction given to customers for prompt payment of their account balance.

FOB Destination Point

A term of sale indicating that gods are owned by the seller until they are delivered to the buyer. Sale is recorded when the goods reach their destination (the customer)

FOB Shipping Point

A term of sale indicating that goods are owned by the buyer the moment they leave the seller's premises. Sale is recorded when the goods leave the seller's shipping department.

Inventory

Assets acquired for resale to customers

Calculating Ending Inventory

BI + P - COGS = EI

Calculating Cost of Goods Sold

BI + P - EI = COGS

Cost of Goods Available for Sale

BI + P = COGAFS