Acc Unit 2 Notes

service compnay

company that sell services, then collect cash

merchandising company

buys inventory, sells inventory, collects cash

Do merchandiser or service companies use inventory

merchandiser

What are 2 types of merchandising companies

retailers and wholesalers

retailers

sell directly to individual

wholesaler

sell inventory to retail businesses for resale to consumers

What are 3 main differences between merchandising and service companies

merchandising reports inventory (goods acquired for resale) as current assets, service companies report supplies (goods acquired for internal use)

service companies earn revenue from services, merchandisers earn from sales

merchandisers report expense as cost of goods sold

Periodic inventory system

updates inventory records for merchandise purchases, sales, and returns at the end of the accounting period. Physically count the inventory —> errors in the balance and income statement

Perpetual inventory system

updates inventory as item is bought, sold, r eturned

shrinkage, and what type of inventory system helps with this

loss inventowry from theft, fraud, errors. Perpetual inventory system helps with this

why can’t we calculate shrinkage with a periodic inventory system

it doesn’t provide up to date record of the inventory that should be on hand. Note that you still have to count inventory occasionally (Yearly) to ensure accounting records are accurate and shrinkage is accounted for perpetual inventory

FOB shipping point

Term of sale indicating that goods are owned by the buyer the moment they leave the seller’s premises. —> loaded onto truck

FOB destination

Term of sale indicating that goods are owned by the seller until delivered to the buyer. —> unloaded to buyer

when goods purchased from a supplier arrives damaged or fails to meet specifications what can buyers do (2)

return them for full refund

Allowance- keep damaged goods and ask for a reducion cost.

2/30, n/60 define each part

2= discount percentage offered

30= number of days in discount period

n= net purchase (after returns and allowances

60= maximum credit period

n/60 indicates the full amount will be due 60 days after ownership transferred

gross profit formula

GP= revenue/net sales - COGS

where is gross profit recorded

not directly recorded in an amount by itself, but a subtotal in the income statement

what is sales returns and allowances

a contra revenue account (rev dec when there’s a return)

GP percentage formula and what does it tell you

(net sales- COG)/ net sales OR GP/Net sales

the percentage of profit earned on each dollar of sale after considering the cost of product sold. Higher ratio means there’s a higher profit available to cover operating and other expenses

what is the GP percentage used for

analyze changes in the company’s operations over time

compare one company to another

determine whether a company is earning enough from sales to cover its operating expenses

net method

purchase and sales discount can be recorded at the time of initial purchase/ sale —> in anticipation they’ll be taken later

gross method

cash is paid and recieved later —> only records discount when they’re actually taken

Is inventory a current or noncurrent asset and which financial statement sheet is it

current asset and balance sheet

formula for COGS

beg inventory

purchases

(ending inventory)

---

COGS

$10,500 of bikes were sold to Walmart with terms FOB shipping point. These terms imply

that the buyer (Walmart) must pay the transportation cost of $200 to the freight company

(such as FedEx or UPS).

record the journal entries

dr inventory 10,500

cr acc payable 10,500

dr inventory 200

cr cash 200

Income statement reporting effect order of sales related transactopms

sales revenue

sales returns and allowances —→ discounts

---

net sales

cost of goods sold

---

gross profit

Q1 EI overstated

Q1 COGS ____ NI ________

Q2 BI _________

Q2 COGS _______ NI __________

understated, overstated

overstated

overstated, understated

Consignment inventory + who’s sheet is it on?

company is holding goods on behalf of the good’s owned. Happens when a company is willing to sell the goods for the owner, but doesn’t want to take ownership of the good in event the goods are difficult to sell

reported on balance sheet of the owner, not the company holding invenory t

goods in transit + who’s balance ssheet

inventory items being transported.

reported on the balance sheet of the owner, not the company transporting it

primary goals of inventory management (3)

maintain quality of inventory to meet customer needs

Ensure inventory quality meets customers expectations and company standards

minimize cost of acquiring and carrying inventory (purchases, theft, spoilage, ect)

Periodic inventory formula

BI

Purchases

---

COGAS

(EI)

---

COGS

Perpetual Inventory formula

BI

purchases

---

COGAS

(COGS)

---

EI

When do companies tend to use specific identification method and what is it

when accounting for expensive and unique items

Accountants need to keep track of the purchase cost of each item

When faced with increasing cost per unit, a company that uses _______ will have a higher income tax expense

FIFO I

In the US, The __________ ________ Rule requires that if LIFO is used on the income tax return, it also must be used in financial statement reporting

LIFO

2 reasons why inventory can fall below it’s recorded cost

easily replaced by identical goods aat a lower cost

became outdated or damaged

Lower of cost or Market/ Net realizable Value (LCM/NRV)

Ensures inventory isn’t reported at no more than its worth. Focuses on inventory value likely to be realized when sold

if cost per item is 25 and value per item is 25, does it need to be written down? how much?

no write down i

if cost per item is 165 and value per item is 150, does it need to be written down? How much

Yes, $15. They recorded it as 165, but the estimates have lowered

if cost per item is 165 and value per item is 150, write the adjusting entry

Dr COGS 15,000

Cr Inventory 15,000

Inventory turnover

Company process of buying and celling. Analyst can access how many times on average inventory has been bought and sold during the period by calculating the inventory turn over ratio

what does a higher inventory turnover ratio indicate

inventory moves more quickly from purchase to sale, reducing storage and obsolescence cost

Inventory turnover ratio formula and what does it tell you

COGS/ Average inventory

Average= (BI + EI)/2

Number of times inventory turns over during the period

Days to sell formula and what does it tell you

35/ turn over ratio

Average number of days from purchase to sale. Higher number means a longer time to sell and easier to interpret.

Often, companies with ___(lower or higher) gross profit percentage has a fster inventory turnover

lower

with inventory turnover ratios varying from industries and companies, its most useful to compare a company’s turnover with…

it’s own results from prior periods