Chapter 5: Accounting for merchandising operations

cost of goods

an expense account that shows the cost merchandise sold

Periodic inventory system

an inventory system where the inventory records need to be updated at year-end to show the inventory on hand

sales allowance

a reduction in price given for unsatisfactory inventory perpetual

perpetual intentory

an inventory system where the cost of goods sold is calculate and recorded with every sales transaction

• continuously shows quantity and cost of inventory that should be on hand for each item

merchandise inventory

an asset that shows the cost of goods purchased for resale

purchase returns

the return of unsatisfactory purchased merchandise

2/10, n/30

the buyer may deduct a 2% discount from the invoice if payment is received within 10 days from the invoice date. the full amount is due 30 days if not paid

delivery expense

an account used to record the cost of delivering merchandise to the customer

sales discounts

a price reduction given by a seller for early payment on a credit sale

operating expenses

incurred in the process of earning sales revenue

gross profit

difference between sales revenue and cost of goods sold

sales tax

collected by merchandising companies on the goods that they sell, periodically remitted to government

• not revenue and are treated as a liability until paid

freight costs

purchase invoice indicates when ownership of the goods is transferred from buyer to seller

FOB shipping point

• buyer pays

• buyer accepts ownership at the place of shipping and pays for shipping costs (buyer debits merchandise inventory)

FOB Destination

• Seller pays

• Buyer accepts ownership when goods are delivered to buyers place business and seller pays freight costs

• seller debits freight out

Quantity discount

reduction in price due to the quantity being purchased

If you get pay early and get a purchase discount

DR accounts payable

CR merchandise inventory

CR cash

recording sales of merchandise

DR accounts recievable

CR sales

DR cost of goods sold

CR merchandise inventory

completing the accounting cycle

• a physical counts is an important control feature

single step income statement

classified as revenues and expenses only

multiple step

five main steps

1. net sales= sales less return, allowances, discounts

2. Gross profit= net sales - cost of goods sold

3. Profit from operations= gross profit - operating expenses

4. non-operating activities= activities not related to operations

5. Profit = profit from operations + non-operating activities

ASPE vs IFRS

ASPE= no order, go by highest to lowest

IFRS= to classify by function

profitability

measure profit or operating success for a specific time period

gross profit

Gross profit/net sales

measures the effectiveness of a company’s purchasing and pricing policies

• does not take into account all revenue and expenses

Profit margin

profit/net sales

• the percentage of sales that results in profit

• measures the ability of a company to cover all expense and provide a return to owners

• takes into account all revenue and expenses