Chapter 6 - Accounting

Service Company

Sell service rather than physical goods; consequently, their income statements show operating expenses from providing services but no cost of goods sold

Merchandise Company

Sell goods that have been obtained from a supplier. Retail merchandise companies sell directly to consumers whereas wholesale merchandise companies sell to retail companies

Periodic Inventory

records are updated only when inventory is counted, usually at the end of each accounting period

Perpetual Inventory System

Promote efficient and effective operations because they provide an up to date record of inventory that should be on hand at any given time. They protect against undetected theft because this up to date record can be compared to a count of the physical quantity that actually is on.

What should an Inventory account include?

Include costs incurred to get inventory into a condition and location ready for sale

What does the cost of inventory include?

Its purchase price and transportation (freight in) minus cost reductions for purchase returns and allowances, purchase discounts, and goods sold. Costs to deliver inventory to customers (freight out) are a selling expense and are not included in inventory

What two entries are made every time inventory is sold in a perpetual inventory system?

One entry records sale and corresponding debit to cash or accounts receivable. The other entry records the cost of goods sold and corresponding credit to inventory

What is reported as contra revenue accounts and what does it do? what is a contra revenue account?

Sale discounts and sales returns and allowances are reported as contra revenues, reducing net sales. A contra revenue account is a special type of account that reduces the amount of gross sales shown on your income statement

What happens when goods and services are sold together for a single “bundled” price?

The price is allocated to the goods and services based on their stand alone price. revenue is then recognized when (as) each performance obligation is satisfied by delivering goods

Name the key item in a merchandiser’s income statement.

Gross profit, which is a subtotal calculated by subtracting cost of goods sold from net sales. The gross profit percentage is calculated and interpreted as follows

Gross profit percentage formula

(Net sales - Cost of Goods) / Net sales) * 100

What does the gross profit percentage tell you? What does a higher ratio mean?

tells the percentage of profit earned on each dollar of sales, after considering the cost of products sold. A higher ratio means that greater profit is available to cover operating and other expenses