Chapter 5 - MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT

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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


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