Chapter 5 - MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT
Determining - Gross Profit Rate
(Net Sales - COGS) DIVIDED Net Sales
Multiple-Step Income Statement
- Highlights the components of net income. - Three important line items: 1) gross profit, 2) income from operations and 3) net income.
Single-Step Income Statement
- Subtract total expenses from total revenues - Two reasons for using the single-step format: 1) Company does not realize any type of profit or income until total revenues exceed total expenses. 2) Form is simple and easy to read.
Purchase Discount Terms
2/10, n/30 - 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1/10 EOM - 1% discount if paid within first 10 days of next month. n/10 EOM - Net amount due within the first 10 days of the next month.
On March 12, Oriole Company received the balance due from Ivanhoe Company.
Accounts Payable DR Cash CR Inventory CR Minus the original inventory from the original returns price equals Accounts Payable Inventory is the discount terms times the Accounts Payable Cash is AP minus Inventory
On March 6, Ivanhoe Company returned $110,500 of the merchandise purchased on March 2. The cost of the merchandise returned was $63,800.
Accounts Payable DR Inventory CR (Original Pricing)
Goods costing $1,900 are purchased on account on July 15 with credit terms of 2/10, n/30. On July 18, the purchaser receives a $300 credit from the supplier for damaged goods. Give the journal entry on July 24 to record payment of the balance due within the discount period.
Accounts Payable DR 1600 Cash CR 1568 Inventory CR 32 1900 - 300 credit = 1600 1600 x 0.02 = 32 1600 - 32 = 1568
Masie Ascot believes revenues from credit sales may be recorded before they are collected in cash. Do you agree? Explain.
Agree
Determining - The Cost of Goods Sold
Beginning Inventory ADD COG Purchased SUBTRACT Ending Inventory = COGS
Finding Freight In
COG Purchased SUBTRACT Net Purchases
Finding COGS
COG available for sale PLUS Ending Inventory
Finding Beginning Inventory
COG available for sale SUBTRACT COG purchased
Finding Ending Inventory
COG available for sale SUBTRACT COGS
Recording Sales of Merchandise [PERPETUAL] - (receiving the balance)
Cash Sales Discount Accounts Receivable Original Accounts Receivable minus Sales Return Allowance equals Accounts Receivable Then you apply the discount terms and subtract to equal your cash value
On March 12, Cullumber Company received the balance due from Oriole Company.
Cash DR Sales Discounts DR Accounts Receivable CR Work bottom up. Accounts Receivable is your original price minus your sales return The sales discount is the discount term applied to your accounts receivable Cash is your accounts receivable minus sales discounts
Using XXs for amounts, give the journal entry for each of the transactions, assuming perpetual inventory.
Cash Sales - Cash DR Sales Revenue CR (to record sales) Cost of Goods Sold DR Inventory CR (to record cost of goods sold) vice versa for credit*
What is the primary source document for recording (1) cash sales and (2) credit sales?
Cash Sales - Cash Register Tapes Credit Sales - Sales Invoice
Cost of goods sold
Cost of goods sold
Cullumber Company provides this information for the month ended October 31, 2017: sales on credit $305,800; cash sales $156,000; sales discounts $5,160; and sales returns and allowances $23,490.
Income Statement SALES Sales Revenue LESS Discounts Return Allowances Net Sales
Other Expenses and Losses
Interest expense and losses
Other revenues and gains
Interest revenue Dividend revenue Rent revenue Gain
On March 2, Oriole Company sold $931,700 of merchandise to Ivanhoe Company, terms 3/10, n/30. The cost of the merchandise sold was $519,700.
Inventory DR Accounts Payable CR (Original Pricing)
Quality of Earnings Ratio
Net Cash Provided by Operating Activities divided Net Income
Determining - Profit Margin
Net Income DIVIDED Net Sales
Finding Cost of Goods Purchased
Net Purchases ADD Freight-in
Determining - Gross Profit
Net Sales SUBTRACT Cost of Goods SOLD
Depreciation expense
Operating Expenses
Non-operating activities
Other Revenues and Gains
FOB Shipping Point
Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller.
FOB Destination
Ownership of the goods remains with the seller until the goods reach the buyer.
Finding Purchase Returns and Allowances
Purchases SUBTRACT Net Purchases
Determining - Net Purchases
Purchases SUBTRACT Purchase Discounts = Net Purchases
Determining - Cost of Goods Purchased
Purchases SUBTRACT Purchase returns and allowances SUBTRACT Purchase discounts ADD Freight-in
Finding Net Purchases
Purchases SUBTRACT Returns and Allowances
Determining - Net Income
Revenues - Expenses
A credit sale is made on July 10 for $900, terms 1/15, n/30. On July 12, the purchaser returns $100 of goods for credit. Give the journal entry on July 19 to record the receipt of the balance due within the discount period.
Sales Discounts DR 8 Cash DR 792 Accounts Receivable 800 (900 - 100 RETURNS = 800) 800 x 0.01 (1% terms) = 8 800 - 8 - 792
Preparing An Income Statement
Sales Revenue LESS Returns Discounts EQUALS Net Sales
Measurement process
Sales Revenue minus Cost of Goods Sold equals Gross Profit minus Operating Expenses equals Net Income
Sales returns and allowances
Sales revenues
On March 6, Oriole Company returned $104,600 of the merchandise purchased on March 2. The cost of the merchandise returned was $64,400.
TWO TRANSACTIONS: Sales Return Allowance DR Accounts Receivable CR Inventory DR Cost of Goods CR
Cullumber Company sold $914,000 of merchandise to Oriole Company, terms 3/10, n/30. The cost of the merchandise sold was $592,400.
TWO transactions: Accounts Receivable DR Sales Revenue CR (Original Price) Cost of Goods Sold DR Inventory CR (Cost of Merchandise [2nd Price])
Freight Costs
Terms of Sale
Scribe Company reports net sales of $800,000, gross profit of $560,000, and net income of $230,000. What are its operating expenses?
gross profit - net income = operating expenses
What merchandising account will appear in the post-closing trial balance?
of the merchandising accounts, only inventory will appear in the post-closing trial balance
Gain on disposal of plant assets
other revenues and gains
