Financial Accounting Chapter 6 Part 2
Multi-step Income Statement: How do you calculate *Income from Operations*
(Gross Profit) - (expenses)
How do you calculate the Gross Profit Percentage?
(Gross Profit)/(Net Sales)
Multi-step Income Statement: How do you calculate *Net Income*
(Income before taxes) - (Income tax expenses)
Multi-step Income Statement: How do you calculate *Income Before Taxes*
(Income from operations) + (any other income) - (interest expenses)
Multi-step Income Statement: How do you calculate *Gross Profit*
(Net sales) - (costs of goods sold)
What would be found on the debit side of Inventory?
- beginning balance - purchases - freight-in
Sales Discounts
- contra revenue account - recorded at the time payment is *received* (b/c before that time, the company doesn't know if the sales discount will be taken)
How can a company increase their gross margin?
- increase selling price - lower cost of goods sold without lowering the quality
Multi-step Income Statement
- must have 3 separate sub-totals before you get the net income. 1. Gross profit 2. Income from Operations 3. Income Before Taxes
Contra Revenue Accounts
- sales discounts - sales returns and allowances - normal balance: debit
A multistep income statement is useful to financial statement users because it
- separates CoGS from other operating expenses, which allows the calculations of gross profit - separates income statement items into meaningful components
In a perpetual inventory system freight out vs freight in
- the seller should record freight-out as a selling expense - the purchaser should record freight-in as an asset (Inventory)
Goods Available for Sale Equation
Beginning inventory + purchases + freight in - purchase returns and allowances - purchase discounts
Where does Other Expenses come from on the multi-step income statement?
Financing Activities
In a journal entry, what is normally paired with Cost of Goods Sold
Inventory (credited) while CoGS is debited
How do you calculate the *Inventory at the end of the period*
Inventory @ end = (Inventory @ beg) + (Purchases) - (CoGS)
Where does Other Income come from on the multi-step income statement?
Investing Activities.
How do you calculate *net sales*
Net sales = (Sales rev) - (sales discounts) - (sales returns & allowances)
What would be found on the credit side of inventory?
Purchase discounts and purcase returns
Income from Operations (on the multi-step income statement)
Shows operating activities. - This shows how much you're making based on what you're in business for
**Why not just reduce revenue when there is a sales return/allowance?
This helps show managers (internal decision makers) the magnitude of reduction. They can get information from these accounts and solve why there are a significant amount of returns. - this doesn't really matter for external decision makers
Gross Profit Analysis
a ratio indicating the percentage of profit earned on each dollar of sales, considering only the costs of the products sold *Gross Profit Percentage* - what you keep from every dollar of sale - if your GPP is 40% than your Cost of Goods sold is 60%
The journal entry to record taking a discount when paying for goods previously purchased on account includes a(n)
decrease in assets and liabilities
Recording Inventory Sales for a *Merchandising* Company
every merchandising sale has two components -- two journal entries 1. records the *revenue* (debit to cash or A/R and credit to sales rev) -- this entry uses the selling price of the goods 2. records the *movement of goods* from inventory to cost of goods sold (debit to CoGS and credit to inventory) -- uses the cost of the goods
Shrinkage
inventory that has just disappeared and is unaccounted for
What is Gross Profit?
it is NOT an account. It's a number on your income statement.
Where do you apply the discount?
only on what the costumer actually keeps
Sales Returns and Allowances
when goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can either return them for full refund OR keep them and ask for a reduction in the selling price (allowance) - may also be possible that the costumers can return satisfactory goods, depending on the sales agreement - reduces your revenue - debited when goods are returned