Conceptual Overview - Chapter 5 - Accounting for Merchandising Businesses

The __________ measures how effectively a business is using its assets to generate sales.

asset turnover ratio

Each subsidiary ledger is represented in the general ledger by a summarizing account, called a

controlling account.

A manual perpetual inventory system is time consuming and

costly to maintain

When this is done, the seller normally sends the buyer a ____________, or _________, indicating its intent to credit the customer's account receivable.

credit memorandum, credit memo

the buyer is allowed an amount of time, known as the _____________, in which to pay. usually begins with the date of the sale as shown on the invoice.

credit period

The terms for when payments for merchandise are to be made are called the __________. If payment is required on delivery, the terms are cash or net cash.

credit terms

Inventory is reported as a

current asset on the balance sheet.

A seller may grant customers a variety of discounts, called _________, as incentives to encourage customers to act in a way benefiting the seller.

customer discounts For example, a seller may offer customer discounts to encourage customers to purchase in volume or order early.

A merchandising business first purchases merchandise to sell to its

customers.

In both cases, the buyer normally sends the seller a ________, often called a _______ to notify the seller of reasons for the return (purchase return) or to request a price reduction (purchase allowance).

debit memorandum, debit memo

Under the periodic inventory system, purchases are normally recorded at their invoice amount as a

debit to Purchases

To encourage the buyer to pay before the end of the credit period, the seller may offer a

discount

The differences between service and merchandising businesses are also reflected in their

financial statements.

Purchases and sales of merchandise often involve

freight

The primary ledger, which contains all of the balance sheet and income statement accounts, is then called the

general ledger.

The cost of goods sold is subtracted from sales to arrive at __________, which is the profit before deducting operating expenses.

gross profit

A criticism of the single-step form is that gross profit and income from operations are not

reported

A high ratio indicates an effective use of

sales

encourages customers to pay their invoice early.

sales discount

When this merchandise is sold, the revenue is reported as ______, and its cost is recognized as an expense called ______ or cost of merchandise sold.

sales, cost of goods

The buyer may use the debit memo as the basis for recording the return or allowance or wait for approval from the _______. In either case, the buyer debits Accounts Payable and credits Inventory.

seller (creditor)

The terms of a sale indicate when ownership (title and control) of the merchandise passes from the

seller to the buyer

The revenue activities of a service business involve providing

services to customers.

An alternative form of income statement is the _______________

single-step income statement.

The single-step form emphasizes total revenues and total expenses in determining

net income

Any processing fees charged by the clearinghouse or issuing bank are periodically recorded as an

expense This expense is normally reported on the income statement as an administrative expense.

On the income statement for a service business, the revenues from services are reported as

fees earned.

The four closing entries for a merchandising business are as follows:

1. Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary. 2. Credit each temporary account with a debit balance, such as the various expenses, and debit Income Summary. Since Cost of Goods Sold is a temporary account with a debit balance, it is credited for its balance. 3. Debit Income Summary for the amount of its balance (net income) and credit the retained earnings account. The accounts debited and credited are reversed if there is a net loss. 4. Debit the retained earnings account for the balance of the dividends account and credit the dividends account.

Sellers are required to estimate returns and allowances at the end of an accounting period and prepare two adjusting entries:

1. The first adjusting entry reduces the sale account and creates a customer refund liability account. 2. The second adjusting entry creates an estimated returns inventory account for merchandise that is expected to be returned and reduces cost of goods sold.

_______________, sometimes called ____________, are incurred in the administration or general operations of the business .-Examples of administrative expenses include: Office salaries Depreciation of office equipment Office supplies used

Administrative expenses, general expenses

The asset turnover ratio is computed as follows:SalesAsset Turnover Ratio = Average Total Assets

Asset Turnover Ratio = Sales/Average Total Assets

is a liability account for estimated refunds and allowances that will be paid or granted customers in the future. It is recorded at the end of the accounting period as part of the adjusting process.

Customer refunds payable

____________________, sometimes called ____________, is determined by subtracting operating expenses from gross profit.

Income from operations, operating income

is a current asset that is reported on the balance sheet after Inventory.

Estimated returns inventory

The ownership of the merchandise may pass to the buyer when the buyer receives the merchandise. In this case, the terms are said to be

FOB (free on board) destination.

The ownership of the merchandise may pass to the buyer when the seller delivers the merchandise to the freight carrier. In this case, the terms are said to be

FOB (free on board) shipping point.

Sales may be made to customers using credit cards such as _______. Such sales are recorded as cash sales.

MasterCard or VISA

______________ is an expense that cannot be traced directly to the normal operations of the business. -Examples of other expenses include: Interest expense Losses from disposing of fixed assets

Other expense

_____________ is revenue from sources other than the primary operating activity of a business. -Examples of other income include: Income from interest Rent Gains resulting from the sale of fixed assets

Other revenue

Revenue from merchandise sales is usually recorded as

Sales

are incurred directly in the selling of merchandise. -Examples of selling expenses include: Sales salaries Store supplies used Depreciation of store equipment Delivery expense Advertising

Selling expenses

In some cases, a customer who is due a refund has an outstanding

account receivable balance

or creditors ledger, lists individual creditor accounts in alphabetical order. The controlling account in the general ledger is

accounts payable subsidiary ledger, Accounts Payable.

or customers ledger, lists the individual customer accounts in alphabetical order. The controlling account in the general ledger is

accounts receivable subsidiary ledger, Accounts Receivable.

In contrast, the revenue activities of a merchandising business involve the

buying and selling of merchandise.

When a buyer receives merchandise that is defective, damaged during shipment, or does not meet the buyer's expectations, the seller may pay the buyer a _________ or grant a _______ that reduces the accounts receivable owed on the original selling price.

cash refund, customer allowance

The single-step form deducts the total of all expenses

in one step from the total of all revenues.

Although merchandising transactions affect the balance sheet in reporting inventory, they primarily affect the

income statement

Other income and other expense are offset against each other on the

income statement

Thus, the physical inventory on hand at the end of the accounting period is usually less than the balance of Inventory. This difference is called

inventory shrinkage or inventory shortage

or inventory ledger, lists individual inventory by item (bar code) number. The controlling account in the general ledger is

inventory subsidiary ledger, Inventory.

Merchandise on hand (not sold) at the end of an accounting period is called __________ or __________.

inventory, merchandise inventory.

The terms of purchases on account are normally indicated on the ___________ bill that the seller sends the buyer.

invoice

Small merchandise businesses, such as a local hardware store, may use a

manual accounting system.

Almost all states levy a tax on sales of

merchandise

The time in days to complete an operating cycle differs significantly among

merchandise businesses.

The operating cycle of a service and merchandising business differs in that a merchandising business must purchase

merchandise for sale to customers.

The activities of a service business differ from those of a

merchandising business.

The ______________ contains several sections, subsections, and subtotals, including the following:

multiple-step income statement Sales Cost of Goods Sold Gross Profit Income from Operations Other Revenue and Expense

An income statement for a merchandising business is normally prepared using either

multiple-step or single-step format

is the process by which a company spends cash, generates revenues, and receives cash either at the time the revenues are generated or later by collecting an accounts receivable.

operating cycle

The operating expenses are subtracted from gross profit to arrive at

operating income

The operating expenses incurred in providing the services are subtracted from the fees earned to arrive at

operating income.

the inventory does not show the amount of merchandise available for sale and the amount sold.

periodic inventory system

There are two systems for accounting for merchandise transactions:

perpetual and periodic.

each purchase and sale of merchandise is recorded in the inventory account and related subsidiary ledger. In this way, the amount of merchandise available for sale and the amount sold are continuously (perpetually) updated in the inventory records.

perpetual inventory system

Since buyers normally take all purchases discounts, Inventory is debited for the net purchase price under the

perpetual inventory system.

Instead, a listing of inventory on hand, called a ________________, is prepared at the end of the accounting period. used to determine the cost of inventory on hand at the end of the period and calculate the cost of goods sold during the period.

physical inventory

A debit memo also informs the seller of the amount the buyer proposes to debit to the account payable due the seller and states the reasons for the return or the request for the

price allowance

Before paying an invoice, a buyer may return inventory or be granted a price allowance for an invoice with a _______. In this case, the amount of the return is recorded at its invoice amount less the discount.

purchase discount

Discounts taken by the buyer for early payment of an invoice are called ___________. taken by a buyer reduce the cost of the merchandise purchased.

purchases discounts

A buyer may request an allowance for merchandise that is returned (purchases return) or a price allowance (purchases allowance) for damaged or defective merchandise. From a buyer's perspective, such returns and allowances are called

purchases returns and allowances.

Most merchandising companies use computerized accounting systems that record similar transactions in separate journals called _________ These journals generate purchase, sales, and inventory reports.

special journals

A large number of individual accounts with a common characteristic can be grouped together in a separate ledger, called a

subsidiary ledger.

Merchandise transactions are recorded in the accounts, using the rules of debit and credit; however, the accounting system for merchandising businesses is often modified

to more efficiently record transactions.

Wholesalers are companies that sell merchandise to other businesses rather than to the public. Many wholesalers publish or upload sales catalogs online. Wholesalers often offer special discounts to government agencies or businesses that order large quantities. Such discounts are called

trade discounts