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