Accounting Chapter 4

Merchandise

products, also called goods, which a company buys to resell

Wholesalers

those that buy from manufacturers and sell to retailers

Retailers

those that buy from manufacturers or wholesalers and sell to consumers

Net Sales - Costs of Goods =

Gross Profit

Merchandise inventory, or Inventory

products that a company owns and intends to sell.

Operating Cycle for a Merchandiser

Begins with purchasing merchandise for cash and ends with collecting cash from selling the merchandise.

Perpetual inventory system

updates accounting records for each purchase and each sale of inventory.

Periodic inventory system

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

Credit Terms

describe cash discounts offered to purchasers by the seller for payment within a specified period of time called the discount period.

Cash Discounts

granted by the seller to encourage buyers to pay the amount they owe earlier. Buyers view cash discounts as purchase discounts and sellers view them as sales discounts.

Purchases on Credit

entry for buyer for purchase using full invoice, gross method is: debit Merchandise Inventory and credit Accounts payable.

Purchases allowances

a reduction in the cost of defective merchandise that a buyer acquires.

Purchases returns

merchandise a buyer acquires but then returns to the seller.

A debit memorandum

informs the seller of a debit made to the seller’s account payable in the buyer’s records

FOB shipping point

the buyer assumes ownership and responsibility for the goods as soon as they leave the seller's shipping point

FOB destination

the seller is responsible for all shipping costs, including insurance and potential damage, until the goods reach the buyer's designated destination

Sales returns

merchandise that a customer returned to the seller after a sale.

Sales allowances

reductions in selling price of merchandise sold to customers (usually for damaged merchandise that a customer is willing to keep at a reduced price).

Credit Memorandum

issued by the seller to inform buyer of a credit made to buyer’s Accounts Receivable in seller’s books.

gross profit - operating expenses =

Income from operations

Single-Step Income Statement

lists cost of goods sold as another expense and shows only one subtotal for total expenses.

How to calculate Acid‑Test Ratio

dividing quick assets by current liabilities.

How to calculate Gross Margin Ratio (Gross Profit Ratio)

by dividing gross margin by net sales.