Accounting Chapter 5

sales returns and allowances journal entry for a return

1 debit sales returns and allowances credit accounts receivable 2 debit inventory credit COGS

sales returns and allowances journal entry for an allowance

1 debit sales returns and allowances credit accounts receivable for the amount of the allowance -an allowance has no impact on inventory or COGS

seller makes two entries for each sale

1 debits accounts receivable or cash credits sales revenue 2 debits COGS credits inventory

two primary reasons for using a single step form

1 a company does not realize any type of profit or income until total revenues exceed total expenses, so it makes sense to divide the statement into these two categories 2 the form is easy and simple to read

a merchandising company has two categories of expenses

1 cost of goods sold 2 operating expenses

to determine the cost of goods sold under a periodic inventory system, the following steps are necessary

1 determine the cost of goods on hand at the beginning of the accounting period 2 add to it the cost of goods purchased 3 subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period

the multiple step i/s has 3 important line items

1 gross profit 2 income from operations 3 net income

in a single step i/s all data are classified into two categories

1 revenues -operating revs and non operating revs and gains (interest revenue and gain on sale of equipment) 2 expenses -COGS, operating expenses and non operating expenses and losses (interest expense, loss on sale of equipment, income tax expense)

how multiple step i/s 3 line items are determined

1 subtract COGS from net sales to determine gross profit 2 deduct operating expenses from gross profit to determine income from operations 3 add or subtract the results of activities not related to operations to determine net income

1/10 EOM (end of month)

1% discount is available if the invoice is paid within the first 10 days of the next month

freight terms are expressed as either

FOB shipping point or FOB destination

FOB means

Free On Board

freight costs incurred by the seller on outgoing merchandise are

an operating expense to the seller -increase expense account (freight-out)

determine COGS under a periodic inventory system

beginning inventory (ending inv from previous period) add: cost go goods purchased which includes purchases less: purchase returns and allowances and purchase discounts add: freight in cost of goods available for sale subtract: ending inventory =COGS

cost of goods available for sale

beginning inventory + cost of goods purchased

periodic inventory system

companies do not keep detailed inventory records of the goods on hand throughout the period

perpetual inventory system

companies maintain detailed records of the cost of each inventory purchase and sale

what kind of companies use a perpetual inventory system

companies that sell merchandise with high unit values (cars, watches, etc.)

why do companies use separate sales accounts for major product lines

company management can monitor sales trends more closely and respond to changes in sales patterns more strategically

non operating activities

consist of various revenues and expenses and gains and losses that are unrelated to the company's main line of operations

sales discounts is a ______ to sales revenue

contra revenue account

sales returns and allowances is a ______ to sales revenue

contra revenue account

as goods are sold they are assigned to

cost of goods sold

what expense is directly related to the revenue recognized from the sale of goods

cost of goods sold

what two things are unique to merchandising companies and not to service companies

cost of goods sold gross profit

normal balance of sales discount

debit

normal balance of sales returns and allowances

debit

purchase discount journal entry without cash discount

debit accounts payable credit cash

purchase discount journal entry with cash discount

debit accounts payable credit cash credit inventory

returned merchandise for lower purchase price journal entry

debit accounts payable credit inventory

returned merchandise journal entry

debit accounts payable credit inventory

sales discount journal entry if the customer does not take the discount

debit cash credit accounts receivable

sales discount journal entry

debit cash debit sales discounts credit accounts receivable

freight costs incurred by seller journal entry

debit freight out credit cash

companies record cash purchases by

debit inventory credit cash

freight costs incurred by buyer journal entry

debit inventory credit cash

net sales

deduct sales return and allowances and sales discounts from sales revenue in the i/s

under a perpetual inventory system, a company determines the cost of goods sold ______

each time a sale occurs

goods that are not sold by the end of the accounting period

ending inventory

business document

every sales transaction should be supported by this that provides written evidence of the sale

gross profit rate

gross profit/net sales

how do the two income statements differ

in the amount of detail displayed and the order presented

companies record purchases of assets acquired for use and not for resale (supplies, equipment) as

increases to specific asset accounts

purchase invoice

indicates the total purchase price and other relevant info

other expenses and losses examples

interest expense casualty losses loss- from sale of an asset loss- from strikes by employees

other revenues and gains examples

interest revenue dividen revenue rent revenue gain

when an invoice is paid within the discount period the amount of the discount decreases

inventory -bc the merchandiser records inventory at its cost and by paying within the discount period it has reduced the cost

why are freight costs incurred by the buyer part of the cost of merchandise purchased

inventory cost should include all costs to acquire the inventory, including freight necessary to deliver the goods to the buyer -recognize these costs as COGS when inventory is sold

sales discount is based on

invoice price less returns and allowances if any

when non operating items are included the label ______ precedes them

"income from operations"

the results of non operating activities are shown in the categories

"other revenues and gains" and "other expenses and losses"

2/10, n/30

"two-ten, net thirty" -2% cash discount may be taken on the invoice price, less (net of) any returns or allowances, if payment is made within 10 days of the invoice date (discount period) -otherwise the invoice price, less any returns or allowances, is due 30 days from the invoice date

retailers

merchandising companies that purchase and sell directly to consumers

wholesalers

merchandising companies that sell to retailers

gross profit represents the ______ of a company

merchandising profit

multiple step income statement is considered

more useful because it highlights the components of net income

what a multiple step income statement looks like

net sales COGS gross profit operating expenses payroll related expenses occupancy, general and administrative total operating expenses income from operations other revenues and gains other revenues other expenses and losses patronage refunds and others income before income taxes income tax expense net income

results of a companies normal operations

net sales - COGS - operating expenses

with gross profit, since expenses have not been deducted, it is ______ of a company

not a measure of the overall profit

in a periodic inventory system, they determine the cost of goods sold ______ with a physical inventory count

only at the end of the accounting period

why is it named a single step income statement

only one step, subtracting total expenses from total revenues is required in determining net income

non operating activities are reported in the i/s immediately after

operating activities

when the buyer pays the transportation costs these costs are considered ______

part of the cost of purchasing inventory -as a result, inventory is debited

paying interest

passing up the discount

companies use one of two systems to account for inventory

perpetual inventory system periodic inventory system

cash register documents

provide evidence of cash sales

sales invoice

provides support for each sale

purchase return

purchaser may return the goods to credit (if the sale was made on credit) or for a cash refund (if the purchase was for cash)

why does a purchase discount offer an advantage to both parties

purchaser saves money -seller is able to shorten the operating cycle by converting the accounts receivable into cash earlier

merchandising company operating cycle

receive cash buy inventory sell inventory accounts receivable

service company operating cycle

receive cash perform service accounts receivable

what a single step income statement looks like

revenues net sales expenses COGS payroll related expenses occupancy, general and administrative patronage refunds and others income taxes net income

sales section of the i/s

sales sales revenue less: sales returns and allowances sales discounts net sales

companies widely use two forms of the income statement

single step income statement multiple step income statement

a firm determines its income from operations by

subtracting operating expenses from gross profit -gross profit - operating expenses

users view operating expenses as ______ and many non operating activities as ______

sustainable non-recurring

when a common carrier (airline, railroad, trucking) transports the goods______

the carrier prepares a freight bill in accord with the sales agreement

any freight costs incurred by the buyer are part of

the cost of merchandise purchased

purchase discount

the credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment

comparisons of current gross profit with past amounts and rates and with those in the industry indicate

the effectiveness of a company's purchasing and pricing policies

gross profit

the excess of net sales over COGS -deducting COGS from net sales -net sales - COGS

sales revenue

the primary source of revenue for merchandising companies is the sale of merchandise, often referred as...

what lengthens an operating cycle

the purchase of inventory and its eventual sale

purchase allowance

the purchaser may choose to keep the merchandise if the seller is willing to grant a reduction of the purchase price

sales discount

the seller may offer the customer a cash discount for the prompt payment of the balance due

FOB shipping point

the seller places the goods free on board the carrier, and the buyer pays the freight costs -ownership passes to the buyer before it is transported

FOB destination point

the seller places the goods free on board to the buyer's place of business, and the seller pays the freight -ownership passes to the buyer once it arrives at place of business

when the seller pays the freight charges

the seller will usually establish a higher invoice price for the goods to cover the expense of shipping

cost of goods sold

the total cost of merchandise sold during the period

when forecasting next years income, analysts put the most weight on ______ and less weight on ______

this years operating income this years non operating activities

the sales agreement should indicate who- the buyer or the seller- is to pay for ______

transporting the goods to the buyers place of business

comprehensive income

unrealized gains and losses that are not included in net income but are reported as part of a more inclusive earnings measure

sales returns and allowances

what the seller records as the OPPOSITE of purchase returns and allowances -transactions where the seller either accepts a return or grants a reduction (allowance) so that the buyer will keep the goods