comm 2010 unit 2 (merchandising operations, inventory, receivables/bad debt/interest revenue)

retailers

sell directly to individual consumers

wholesalers

sell to retail businesses

cost of goods sold

expense representing total cost of all goods sold during the period

inventory

cost of acquiring unsold goods

sales revenue

total selling price of sold goods

gross profit definition

profit earned before taking into account other expenses

gross profit equation

sales revenue - cost of goods sold

cost of goods sold equation

beginning inventory + purchases - ending inventory

periodic inventory system

updates inventory records only at end of period

perpetual inventory system

updates records every time an item changes hands

shrinkage

loss of inventory from theft, fraud, and error

fob shipping point

buyer takes ownership after the goods leave the seller's place of business

fob destination

seller has ownership until buyer unloads goods

2/30, n/60

if paid by 30th day of ownership, 2% discount, otherwise full amount owed in 60 days

gross profit percentage definition

measures % profit earned on each dollar of sales

gross profit percentage equation

(net sales - cogs)/net sales

merchandise inventory

products acquired in a finished condition, ready for sale

raw materials inventory

raw materials pre production process

work in process inventory

goods in the process of being manufactured

finished goods inventory

ready for sale

consignment inventory

company holds goods on behalf of owner (reported on owner's statement)

goods in transit

inventory being transported

goals of inventory management

maintain a sufficient quantity of inventory to meet customers' needs, ensure inventory quality meets expectations and standards, minimize the cost of acquiring and carrying inventory

periodic cogs equation

beginning inventory + purchases - ending inventory = cogs

perpetual cogs equation

beginning inventory + purchases - cogs = ending inventory

fifo

assumes inventory costs flow out in the order goods are received

lifo

assumes inventory costs flow out in the opposite order goods are received in

weighted average cost

uses weighted average of the costs of goods available for sale

specific identification method

individually identifies and records cost of each item sold as cogs

weighted average cost equation

cost of goods available for sale / number of units available for sale

lower of cost or market/net realizable value

when inventory falls below cost, inventory should be written down to the lower value

inventory turnover

process of buying and selling (higher ratio means inventory moves more quickly)

inventory turnover ratio equation

cost of goods sold / average inventory

pros of extending credit

helps business customers buy and increases revenues

cons of extending credit

increased wage costs, bad debt costs, delayed receipt of cash

receivable write-off

removing uncollectible account and corresponding amount from the allowance

percentage of credit sales method

estimated percent of bad debt losses x current credit sales

aging accounts receivable method

estimates portion of receivables of specific age will not be paid

recovery

collecting previously written off account

interest revenue equation

principal x interest rate x time

receivables turnover

process of selling and collecting (higher ratio means faster collection which means shorter operating cycle which means more cash available)

receivables turnover ratio equation

net sales revenue / average net receivables

days to collect

365/receivables turnover ratio