Chapter 6: Merchandising Operations and the Multistep Income Statement

Operating activities

________ are done by companies and businesses to generate revenues.

Service companies

________ provides a service to their customers (ex: gym memberships, cleaning services).

Selling a service
Collecting payment
Using the cash to pay for operating expenses

The operating cycle for service companies:

Merchandising companies

________ buy products from manufacturers to resell to their customers.

Buy inventory
Reselling inventory
Collecting cash
Using the cash to pay for operating expenses

The operating cycle for merchandising companies:

Manufactoring companies

________ make their own products to sell.

inventory

The products made by manufacturers and sold by merchandisers is ________. The day you buy ________, it is an asset and once its sold, its an expense.

Sales Revenue

________ is the total selling price of all goods sold.

Cost of Goods Sold

________ is the total cost of all goods sold.

Gross profit

________ represents profit earned before taking into account other expenses such as salaries, wages, depreciation, etc. It is the most important calculation for the Multistep Income Statement.

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Equation for Gross Profit:

Beginning inventory

________ is the stock of inventory we have at the start of an accounting period.

Purchases

________ are what you buy throughout the year.

Goods Available for Sale

________ is everything you can potentially sell.

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Equation for Cost of Goods Available for Sales:

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Equation for Cost of Goods Sold:

Cost of Goods Sold on the Income Statement.

Once goods available for sale are sold, they become ________.

Ending Inventory

________ is the stock of inventory you still have at the end of the accounting period.

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Equation for Ending Inventory (perpetual):

periodic inventory system

A ________ updates the inventory records for merchandise purchases, sales, and returns ONLY at the END of the accounting period.

self owned, mom and pop shops

The periodic system is used for ________.

physical count of inventory at the end of the accounting period.

For the periodic system, there must be a ________.

Cost of Goods Sold equation

We use the ________ for the periodic system.

it cannot calculate theft

The disadvantage of the periodic system is ________.

perpetual inventory system

When using a(n) ________, inventory is updated every time it is bought, sold, or returned.

bigger businesses like Walmart or Target.

The perpetual system is used for ________.

Ending Inventory equation

We use the ________ for the perpetual system.

physical count at least once a year

For the perpetual system, there must be a ________.

shrinkage

The perpetual system can also estimate ________, which is the loss of inventory from theft, fraud, and error.

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The equation for shrinkage:

inventory control

A perpetual system has better ________ because it is continuously updating its inventory count.

Free on Board

FOB stands for ________.

FOB shipping point

The sale for ________ is recorded when the seller loads the goods onto the truck.
Goods in transit belong to the customer at the point of shipping.
"Delivery" occurs when goods are loaded onto the truck.

FOB destination

The sale for ________ is recorded when the goods arrive to the customer.
Before this arrival, the goods belong to the seller until they reach their destination.
"Delivery" occurs when goods are ready to be unloaded by the buyer.

Purchases Returns and Allowances

________ is a contra account to purchases. It has a normal debit balance.

allowance

If an item is damaged or unsatisfactory, the product can be returned for a full refund or kept by customer with a cost reduction, aka ________.

Purchase discounts

________ are an incentive for prompt payment.

discount period offered.

In 2/30, n/60:
The 2 represents the ________.

discount period

In 2/30, n/60:
The 30 is the number of days the offer is available, aka the ________.

final payment

In 2/30, n/60:
The 60 is the maximum credit period and indicates when the ________ is due.

net purchase

In 2/30, n/60:
The "n "is for "________ (after returns and allowances)

One to record the sale at the selling price (debit Cash, Credit Sales Revenue) and one to record cost (debit Cost of Goods Sold, credit Inventory)

Every merchandise sale will have two journal entries and are recorded in a perpetual inventory system:

Sales Returns and Allowances

________ is a contra account to sales and has a normal debit balance.

One to updates sale records (debit Sales R & A, credit Cash) and one to update inventory records (debit inventory, credit Cost of Goods Sold)

There are two journal entries for Sales Returns and Allowances:

Sales Discount

When giving customers a discount, instead of lumping the discount into a sales revenue account, we use a contra-account called ________. It is attached to Sales Revenue and has a normal debit balance.

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The equation for Gross Profit

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The equation for Net Sales

bundle

A(n) ________ is packaging items together and selling them for one price to create a "deal "for the customer.

products and services (sometimes together)

Bundles can include ________.

if there is a product and service bundle, the service must be provided before recording revenue.

Bundles with products and bundles with products AND services are different because

The steps for the Five Step Revenue Model

Identify the contract.
Identify the seller's performance obligations.
Determine the transaction price.
Allocate the transaction price to the performance obligation.
Recognize revenue when each performance obligation is satisfied.

Multistep Income Statement

The ________ reports alternative measures of income by calculating subtotals for core and peripheral business activities. It contains more than one year for comparative purposes.

Selling, General, and Administrative Expenses

________ groups expenses like salaries, wages, utilities, advertising, rent, and transportation.

Gross profit analysis

________ is used to help compare multistep income statements.

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Equation for GROSS PROFIT PERCENTAGE %

What the ratio calculated from the Gross Profit % equation can be used for

Analyze the company's operations over the years, compare company to company, and to see if a company is getting enough income to cover its operating expenses.

higher percentage

We want a(n) ________ for our gross profit ratio.

Gross Method

The ________ correlates with the perpetual method.

"wait and see"

The Gross Method can also be called the ________ method because we see if the discount is taken before recording it.

Net Method

The _______ correlates to the periodic method.

"assumption"

The Net Method can also be called the ________ method because we record as if the discount was taken. If the discount is not taken, we update the record.