Financial Account Ch. 4

Purchase Allowance

An amount granted to the purchaser as an incentive to keep goods that are not "as ordered"

Merchandiser's Financial Statements

Because the operating cylce of a merchandiser is different than that of a service company, the financial statements differ.

Purchase Discounts Journal Entry

Debit Accounts Payable, Credit Cash (Full amount -discount) and Merchandise Inventory (Full Amount x Discount Rate)

Net Income For Merchandising Company

Gross Profit - Operating Expenses = Net Income

What the Balance Sheet Includes

Merchandise Inventory in the current assets section representing the value of inventory that the business has on hand to sell to customers. Remember that the assets in the current asset section are listed in the order of liquidity; therefore, Merchandise inventory is usually listed below Accounts Receivable but before the prepaid assets.

Wholesaler

a merchandiser who buys goods from a manufacturer or a wholesaler and then sells those goods to consumers.

Cost of Goods Sold

the cost of the merchandise inventory that the business has sold to customers

Credit Terms

the payment terms of purchase or sale as stated on the invoice

Operating Cycle of a Merchandiser

1. Begins when the company purchases inventory from an individual or business, called a vendor. 2. The company then sells the inventory to a customer. 3. Finally, the company collects cash from customers.

Sales Revenue

A merchandising company reports revenue using sales revenue instead of service revenue.

Purchase Return

A situation in which sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable

Purchase Return

Debit Accounts Payable, Credit Merchandise inventory (Amount x Price of the item)

Perpetual Merchandise Purchases

Debit Merchandise Inventory, Credit Cash Debit Merchandise Inventory, Credit Accounts Payable

Gross Profit

Determined before calculating net income. Excess of Net Sales Revenue over Cost of Goods sold. this is the extra that the merchandiser has not given the vendor, their profit.

Perpetual Inventory Cont.

In a perpetual inventory system, merchandise inventory and purchasing systems are integrated with the records for Accounts Receivable and Sales Revenue. (e.g. major department stores' computers use barcodes to keep up-to-the-minute records and show the current inventory at any time.

Balance Sheet Changes

Merchandise inventory is included in a merchandising company's current assets

Cost of Inventory Purchased

Net Cost = purchase cost of inventory - purchase returns and allowances - purchase discounts - freight in

Merchandise Inventory Systems:

Perpetual and Periodic

Gross Profit Formula

Sales Revenue - Cost of Goods Sold = Gross Profit

Merchandise Inventory

The merchandise that a business sells to customers

Merchandiser

a business that sells merchandise, or goods, to customers. The merchandise that this type of business sells is called merchandise inventory.

Purchase Discounts

a discount that businesses offer to purchasers as an incentive for early payment.

Income Statement

a merchandising company reports revenues using an account called Sales Revenue rather than the account Service Revenue used by service companies. A merchandiser also reports the cost of merchandise inventory that has been sold to customers or Cost of Goods Sold.

Invoice

a seller's request for payment from the purchaser

Operating Expenses

expenses, other than Cost of Goods Sold, that occur in the entity's major ongoing operations

Perpetual Inventory System

keeps a running computerized record of merchandise inventory--that is, the number of inventory units and the dollar amounts associated w/ the inventory are perpetually (constantly) updated. This system achieves better control over the inventory. A modern perpetual inventory system records the following: - Units purchased and cost amounts. - Units sold and sales and cost amounts. - The quantity of merchandise inventory on had and its cost

Periodic Inventory system

requires businesses to obtain a physical count of inventory to determine the quantities on hand. The system is normally used for relatively inexpensive goods, such as in a small, local store without optical-scanning cash registers that does not keep a running record of every loaf of bread and every keychain that it sells. Restaurants and small retail stores often use the periodic inventory system.