Acct207: Chapt. 5

Goods of $100 were sold at 2/10, n30 on June 1. Payment is received on June 8. How much cash is received?

$98

Contra Revenue ( examples )

- Sales returns & allowances - Sales discounts

Purchase Discount

A cash discount claimed by a buyer for prompt payment of a balance due.

Purchase Allowance

A deduction made to the selling price of merchandise, granted by the seller, so that the buyer will keep the merchandise.

Perpetual Inventory System

A detailed inventory system in which a company maintains the cost of each inventory item and the records continuously show the inventory that should be on hand.

Sales Invoice

A document that provides support for each sale.

Sales Discount

A reduction given by a seller for a prompt payment of a credit sale.

Purchase Return

A return of goods from the buyer to the seller for cash or credit.

Contra Revenue

An account that is offset against a revenue on the income statement.

Periodic Inventory System

An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.

Identify the differences between a service and merchandising company.

Because of the presence of inventory, a merchandising company has sales revenue, cost of goods sold, and gross profit. To account for inventory, a merchandising company must choose between a perpetual inventory system and a periodic inventory system.

Periodic Inventory System ( formula )

Beginning Inventory + Net Purchases -------------------------- Cost of Good Available For Sale - Ending Inventory --------------------------- Cost of Goods Sold

Operating expenses include interest expense and income tax expense.

FALSE

The periodic inventor system provides an up to date amount of inventory on hand.

FALSE

Gross Profit Ratio ( formula )

Gross Profit / Net Sales ( you can use regular sales if net sales is not provided )

Gross Profit Ratio

Gross profit expressed as a percentage by diving the amount of gross profit by net sales.

Net Sales ( formula )

Gross sales ( both credit and cash ) Minus: Sales Returns and Allowances Minus: Sales Discounts ----------------------------------------- Net Sales

Distinguish between a single-step and a multiple-step income statement.

In a single-step income statement, companies classify all data under two categories, revenues or expenses, and net income is determined in one step. A multiple-step income statement shows numerous steps in determining net income, including results of nonoperating activities.

Profit Margin

Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales.

Gross Profit ( formula )

Net sales - Cost of Goods Sold = Gross Profit 100% 40% 60%

Sales Revenue

Primary source of revenue for a merchandising company.

Explain the factors affect profitability.

Profitability is affected by gross profit, as measured by the gross profit rate, and by management's ability to control costs, as measured by the profit margin.

Perpetual Inventory System ( formula )

Sales Revenue less: sales return & allowances + discount ---------------------------------------------- Net Sales - Cost of Goods Sold ----------------------------------------------- Gross Profit - Operating Expenses ------------------------------------------------ Income from Operations + Other Revenues & Gains - Other Expenses and Losses ------------------------------------------------- Income before income taxes - Income tax expense ( multiply the tax rate by income before tax to determine tax expense ) -------------------------------------------------- Net Income

Net Sales

Sales less sales return & allowances and sales discounts.

Freight cost incurred by seller on outgoing merchandise are an operating expense to the seller

TRUE

Goods in transit shipped F.O.B. shipping point should be included in the buyer's ending inventory.

TRUE

Explain the recording of purchases under a perpetual inventory system.

The Inventory account is debited for all purchases of merchandise and for freight costs, and it is credited for purchase discounts and purchase returns and allowances.

Gross Profit

The excess of net sales over the cost of goods sold.

Determine cost of goods sold under a periodic inventory system.

The periodic system uses multiple accounts to keep track of transactions that affect inventory. To determine cost of goods sold, first calculate cost of goods purchased by adjusting purchases for returns, allowances, discounts, and freight-in. Then calculate cost of goods sold by adding cost of goods purchased to beginning inventory and subtracting ending inventory.

Cost of Goods Sold

The total cost of merchandise sold during the period.

F.O.B. Destination

Title transfers at the buyer's business/store. Seller pays for shipping and buyer does not own unit in its possession.

F.O.B. Shipping point

Title transfers at the supplier's (manufacturers') plant. Buyer pays for shipping and owns at shipping point.

Sales Returns & Allowances

Transactions in which the seller either accepts goods back from the purchaser ( a return ) or grants a reduction in the purchase price ( an allowance ) so that the buyer will keep the goods.

Explain the recording of sales revenues under a perpetual inventory system.

When inventory is sold, Accounts Receivable (or Cash) is debited and Sales Revenue is credited for the selling price of the merchandise. At the same time, Cost of Goods Sold is debited and Inventory is credited for the cost of inventory items sold. Separate contra revenue accounts are maintained for Sales Returns and Allowances and Sales Discounts. These accounts are debited as needed to record returns, allowances, or discounts related to the sale.

What type of account is sales discouns (cash discounts)?

contra-revenue

What type of account is sales returns and allowances?

contra-revenue