Chapter 5 Accounting for Merchandise OPerations

Merchandise

Goods a company buys to resell

Cost of goods sold

Cost of merchandise sold

Gross profit (gross margin)

Net sales minus cost of goods sold.

Inventory

Cost of merchandise owned but not yet sold. It is a current asset on the balance sheet.

Perpetual inventory system

Updates accounting records for each purchase and each sale of inventory

Periodic inventory system

Updates accounting records for purchases and sales of inventory only at the end of a period.

Cash discount

A purchases discount on the price paid by the buyer, or a sales discount on the amount received for the seller

Credit terms example

2/10,n/60 means full payment is due within 60 days but the buyer can deduct 2% of the invoice amount if payment is made within 10 days.

Gross method

Initially record purchases at gross (full) invoice amounts

Sales Discounts

A contra revenue account meaning Sales Discounts is subtracted from Sales when computing net Sales.

Sales allowance

A price reduction agreed to when a buyer is unsatisfied with the goods.

Inventory Shrinkage

An adjusting entry to account for the loss of inventory due to theft or deterioration. It is computed by comparing a physical count of inventory with recorded amounts.

Closing Entries

Differences between merchandisers and service companies in red

Multiple step income statement

Three parts: (1)gross profit; (2)income from operations, which is gross profit minus operating expenses; and (3) net income, which is income from operations plus or minus nonoperating items.

Operating expenses

Separated into selling expenses and general & administrative expenses

Selling expenses

Expenses of advertising merchandise, making sales, and delivering goods to customers.

General and Administrative expenses

Expenses that support a company’s overall operations, including account and hr

Nonoperating activities

Consist of expenses, revenues, losses, and gains that are unrelated to a company’s main operation