Ch 5 - Accounting for Merchandising Operations

ACC 101

retailers

merchandising companies that purchase and sell directly to consumers

• e.g., Walmart, Office Depot

wholesalers

merchandising companies that sell to retailers

• e.g., McKesson, United Stationers

sales revenue

the primary source of revenue in a merchandising company

cost of goods sold

the total cost of merchandise sold during the period

operating expenses

expenses incurred in the process of earning sales revenue

• e.g., advertising expense and rent expense

gross profit

the excess of net sales over the cost of goods sold

• = Sales Revenue - Cost of Goods Sold

inventory

the merchandise that companies buy and sell to customers

• reported as a current asset on the balance sheet

perpetual inventory system

an inventory system under which the company keeps detailed records of the cost of each inventory purchase and sale in the Inventory account, and the records continuously show the inventory that should be on hand

• Companies determine the cost of goods sold each time a sale occurs

periodic inventory system

an inventory system under which the company does not keep detailed inventory records in the Inventory account throughout the accounting period but determines the cost of goods sold only at the end of an accounting period

• Companies determine the cost of goods sold only at the end of the accounting period

purchase invoice

a document that supports each credit purchase

FOB shipping point

freight terms indicating that the seller places goods free on board the carrier, and the buyer pays the freight costs

• Ownership of goods passes to the buyer when the public carrier accepts the goods from the seller

• Buyer pays freight

FOB destination

freight terms indicating that the seller places the goods free on board to the buyer’s place of business, and the seller pays the freight

• Ownership of goods remains with the seller until the goods reach the buyer

• Seller pays freight

purchase return

a return of goods from the buyer to the seller for a cash or credit refund

purchase allowance

a deduction made to the selling price of merchandise, granted by the seller so that the buyer will keep the merchandise

purchase discount

a cash discount claimed by a buyer for prompt payment of a balance due

• e.g., 2/10, n/30; meaning 2% discount if payment is made within 10 days, otherwise, the net amount is due within 30 days

sales invoice

a document that supports each credit sale

sales returns and allowances

transactions where the seller either accepts goods back from the buyer (a return) or grants a reduction in the purchase price (an allowance) so the buyer will keep the goods

contra revenue account

an account that is offset against a revenue account on the income statement

• e.g., Sales Returns and Allowances is deducted from Sales Revenue on the income statement; Sales Discounts to Sales Revenue

• Normal balance = debit

sales discount

a reduction given by a seller for prompt payment of a credit sale

• Normal balance = debit

multiple-step income statement

an income statement that shows several steps in determining net income

• distinguishes between operating and nonoperating activities

• highlights intermediate components of net income

• shows subgroupings of expenses

gross profit

the excess of net sales over the cost of goods sold

• = Sales revenue (or Net sales) - Cost of Goods Sold

• represents the merchandising profit of a company; not the overall profit

gross profit rate

gross profit expressed as a percentage, calculated by dividing the amount of gross profit by net sales

• = Gross profit / Net sales

• expresses a more meaningful (qualitative) relationship between net sales and gross profit

selling expenses

• Advertising expense

• Sales salaries

• Freight-out

administrative expenses

• Insurance expense

• Utility expense

• Depreciation expense

nonoperating activities

various revenues, expenses, gains, and losses that are unrelated to a company’s main line of operations

income from operations

income from a company’s principal operating activity, determined by subtracting operating expenses from gross profit

• identifies the results of the company’s normal operations

• = Net Sales - Cost of Goods Sold (aka Gross Profit) - Operating Expenses

other revenues and gains

a nonoperating-activities section of the income statement that shows revenues and gains unrelated to the company’s main line of operations

• e.g., interest revenue, dividend revenue, rent revenue, gain from the sale of property, plant, and equipment

other expenses and losses

a nonoperating-activities section of the income statement that shows expenses and losses unrelated to the company’s main line of operations

• e.g., interest expense, casualty losses, loss from the sale of abandonment of property, plant, and equipment, loss from strikes

single-step income statement

an income statement that shows only one step—subtracting total expenses from total revenues—in determining net income

• revenues - include both operating revenues and other revenues and gains

• expenses - include both operating revenues and other revenues and gains

net income

the total of the debit column exceeds the total of the credit column in the balance sheet columns

net loss

the total of the credits exceeds the total of the debit balances