Chapter 5 Accounting For Merchandising Operations

Cost of goods sold is the total cost of merchandise sold during the period

Sales-Cost of goods sold= Gross profit

Gross profit-operating expenses=net income

Gross Profit divided by sales=

The operating cycles of a Merchandising Company ordinarily is longer than that of a service company

Beginning Inventory + Purchases= Goods Available for sale - Ending Inventory= Cost of goods sold

Perpetual System: Maintains detailed records of the cost of each inventory purchase and sale. Records continuously inventory that should be on hand for every item. The company determines cost of goods sold each time a sale occurs

Periodic System: Does not keep detailed records of the goods on hand. Cost of goods sold determined by count at the end of the accounting period

Advantages of the Perpetual System: Traditionally used for merchandise with high unit values, Shows the quantity and cost of the inventory that should be on hand at any time. Provides better control over inventories than a periodic system

Freight Costs: incurred by the seller are an operating expense

FOB Shipping Point: Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller (Buyers Pays)

FOB Destination: Ownership of the goods remains with the seller until the goods reach the buyer (Seller Pays)

Credit Terms: may permit buyer to claim a cash discount for prompt payment. Basically lets them convert accounts receivable into cash more quickly

Performance obligation is satisfied when the goods are transferred from the seller to the buyer

"Flip Side" of purchase returns and allowances

Contra-revenue account to Sales Revenue

Sales not reduced (Debited) because

• Would obscure the relative importance of sales returns and allowances as a percentage of sales

• Could distort comparisons between total sales in different accounting periods

Contra Revenue Account (Debit) to sales revenue

Sales Discounts and Sales returns and allowances both reduce sales of "Net Sales"

Operation Expense that incurs when you operate your business.

FOB Shipping Point the Buyers Pays

Inventory: is accounted at cost

• Cost includes all expenditures necessary to acquire goods and place them in a condition ready for sale

• Unit costs are applied to quantities to compute the total cost of the inventory and the cost of goods sold using the following costing methods

Beg Inv+Purchases=Goods Available for sale-ending inventory=Cost of goods sold

Four Methods to calculate cost of goods sold:

• Specific Identification: For very few items and Active physical flow costing method in which items still in inventory are specifically costed to arrive at the total cost of the ending inventory. Basically price for price like a pawn shop

• First in, First Out (FIFO): Costs of the earliest goods purchased "oldest" are the first to be recognized in determine cost of goods sold. Often parallels actual physical flow of merchandise. Companies determine the cost of the ending inventory by taking the unit cost of the most recent purchase and working backward until all units of inventory have been costed.

• Last in, First Out: Newest goods that are bought will be sold first. Possible to save income taxes

• Average Cost: Allocates cost of goods available for sale on the basis of weighted average of all the cost. COGS is between LIFO and FIFO

LIFO gives the lowest income taxes

LIFO conformity rule requires that if companies use LIFO for tax purposes they must all use it for financial reporting purposes.