Accounting Chapter 5 Reading Notes

FOB Destination-

FOB Destination-means the buyer takes ownership(title) to the goods at the delivery destination point. In most cases, the seller(owner of the goods while in transit) also pays the freight.

b. freight out-

b. Freight Out- is the transportation cost to ship goods out of the sellers warehouse and to the customer, thus, it is freight on goods sold.

(Cost Of Inventory Purchased)-

(Cost Of Inventory Purchased)-the net cost of merchandise inventory purchased includes the purchase cost of inventory, less purchase returns and allowances, less purchase discounts, plus freight in. Knowing the net cost of inventory allows a business to determine the acquittal cost of the merchandise purchased and is a calculated as follows: (Net cost of inventory purchased= Purchase cost of inventory- purchase returns and allowances-purchase discounts+ freight in)

-FOB Shipping Point- (Freight In)

-FOB Shipping Point-means the buyers takes ownership (title) to the goods after the goods leave the sellers place of business (Shipping point). In most cases the buyer(owner of the goods while in transit) also pays the freight.

1. Periodic Inventory System-

1. Periodic Inventory System- an inventory system that requires businesses to obtain a physical count of inventory to determine quantities on hand. The system is normally used for relatively inexpensive goods, such as in a small, local store without optimal scanning cash registers that does not keep a running record of every loaf of bread and every key chain that it sells - Restaurants and small retail stores often use the periodic inventory system - Becomes less popular as most accounting is used with computerized methods

Cost of goods sold(COGS)-

Cost of goods sold(COGS)-a merchandiser also reports the cost of merchandise inventory that has been sold to customers or cost of goods sold. The cost of merchandise inventory that the business has sold to customers. Cost of goos sold is also called cost of sales. Because COGS is usually a merchandisers main expense, an intermediary calculation, gross profit, is determined before calculating net income

Gross Profit

Gross Profit- excess of net sales revenue over cost of goods sold. Gross profit(also called gross margin) is calculated as net sales revenue minus cost of goods sold & represents the markup on the merchandise inventory. Gross profit is the extra amount the company receives from the customer(for the merchandise sold) over what the company paid to the vendor.

Perpetual Inventory System-

Perpetual Inventory System-an inventory system that keeps a running computerized record of merchandise inventory. - Keeps a running computerized record of merchandise inventory- that is, the number of inventory units and the dollar amounts associated with the inventory are perpeutally(constantly)updated. This system archives better control over the inventory A modern perpetual inventory system records the following: Unit purchased and cost amounts units sold and sales and cost amounts The quantity of merchandise innovatory on hand and its cost ***In perpetual innovatory system, merchandise invetory & purchasing systems are integrated with the records for accounts receivable & sales revenue. For example, major department stores computers use bar codes to keep up to the minute records and show the current inventory at any time ***In perpetual inventory system, the cash register at the store is a computer terminal that records sales and updates inventory records(Bar codes are scanned by a laser. The bar coding is linked to merchandise inventory and cost date that are used to keep track of each unique inventory item.

(Purchase Returns and Allowances) Purchase Allowance-

Purchase Allowance- an amount granted to the purchaser as an incentive to keep goods that are not "as ordered" (together purchase returns and allowances decrease the buyers cost of the merchandise inventory)

Sales Discounts-

Sales Discounts- Reduction in the amount of cash received from a customer for early payment. We saw that purchase discounts decrease the cost of inventory purchases In the same way, sales discounts- decrease the net amount of revenue earned on sales. The sales discounts is a contra account to sales revenue(recall that a contra account has the opposite normal balance of its companion account)So sales discounts is a contra revenue account and has a normal debit balance.

Sales Revenue-

Sales Revenue- the amount that a merchandiser earns from selling its inventory. At the time of the sales, two entries must be recorded in the perpetual innovatory system. a. One entry records the sales revenue and the cash(or accounts receivable) at the time of the sale. b. The second entry records cost of goods sold(debit the expense ) and reduces the merchandise inventory(credit the asset) remember cost of goods sold is an expense account and represents the cost of inventory that has been sold to customers -To record the sale by smart touch learning, two journal entries must be recorded. The first journal entry must also be made to record the expense and decrease the merchandise inventory balance. this entry record the sales revenue b. This entry records the expense and the reduction of merchandise innovatory

Sales return and allowances-

Sales return and allowances- decreases in the sellers receivable from a customers return of merchandise or from granting the customer an allowance from the amount owed to the seller. After making a sale smart touch learning may have customers http return goods asking for a refund or credit to the customers account. - Or the company may instead grant a sales allowance to encourage the customer to accept the nonstandard good.

( When merchandisers are required to pay for shipping costs, those costs are classified as either freight in or freight out as follows:) a. Freight in- (FOB shipping point)

a. Freight in- is the transportation cost to ship goods into the purchasers warehouse, thus it is freight on purchased goods. -Freight in- with the terms FOB shipping point, the buyers owns the goods while they are in transit, so the buyers pays the freight. Because the freight is a cost that must be paid to acquire the inventory, freight becomes part of the cost of merchandise inventory As a result, freight in costs are debited to the merchandise inventory account (Freight In Within Discount Period) Discounts are computed only on the merchandise purchased from the seller. Discounts are not computed on the transportation cost because there is no discount on freight Freight in- with the terms FOB shipping point, the buyers owns the goods while they are in transit, so the buyers pays the freight. Because the freight is a cost that must be paid to acquire the inventory, freight becomes part of the cost of merchandise inventory As a result, freight in costs are debited to the merchandise inventory account