accounting chapter 4

Chapter Overview

• Chapter Four: Accounting For Retail Operations

Service Businesses vs. Merchandise Operations

• Retail Operations: Revenue activities focus on buying and selling merchandise.

  • Example: Home Depot Inc.

• Service Businesses: Revenue activities focus on providing services to customers.

  • Example: Family Health Care, P.C.

Operating Cycles

Service Business

• Perform Service: Recognize revenue upon completion.

• Collection: Accounts Receivable generated, followed by cash collection.

Retailer/Merchandiser

• Collect Accounts Receivable: Process of gathering funds from customers.

• Sales: Revenue from merchandise sales.

• Purchase of Merchandise: Inventory acquisition.

Income Statement Differences

Retail Businesses vs. Service Businesses

• Retail Business:

  • Sales: $XXX

  • Cost of Goods Sold: (XXX)

  • Gross Profit: $XXX

  • Operating Income: $XXX

• Service Business:

  • Fees earned: $XXX

  • Operating Expenses: (XXX)

  • Operating Income: $XXX

New Items on the Income Statement

• Gross Profit: Calculated as Net Sales – Cost of Goods Sold (COGS).

  • Net Sales: Sales revenue minus returns and discounts.

  • Cost of Goods Sold: Cost incurred for merchandise sold.

Inventory Systems

Periodic System

• Inventory records are updated periodically.

• Purchases recorded in the "Purchases" account.

• COGS determined at the end of the period through counts.

Perpetual System

• Inventory records updated at the point of sale.

• Purchases recorded in the "Inventory" account and adjusted accordingly.

Computation of Cost of Goods Sold

• Beginning Inventory + Purchases - Ending Inventory = COGS

Illustration of Purchase Transactions

• Use TechSource, a retailer, to illustrate merchandise transactions.

• Integrated Financial Statement Framework demonstrates transaction effects.

Sample Invoice for a Purchase

• From: ABC Printers to TechSource

• Details include quantity, unit price, and total amount due.

• Terms: 2/10, n/30 indicating payment conditions.

Purchase Discounts

• Discounts incentivize early payments by buyers.

• Sellers benefit by receiving payments quicker.

Credit Terms Explained

• 2/10, n30: 2% discount for payment within 10 days, balance due in 30 days.

• Payments due as agreed upon credit terms.

Credit Terms Date Determination Example

• Calculates specific payment dates and amounts based on invoice details.

• Discount period and final due dates outlined clearly.

Effects of Purchases on Account with Discount

• Transactions recorded at the net amount.

• Effects on financial statements include adjustments in balance sheet and cash flow.

Effects of Paying on Account

• Payment effects documented with similar structure in financial statements.

Freight Terms

• Define the legal responsibility and shipping obligations.

• FOB Shipping Point: Buyer responsible for freight.

• FOB Destination: Seller responsible for freight.

Effects of Purchase and Freight

• Example transaction highlighted with costs and responsibilities.

Returns and Debit Memorandum

• Returns documented through a Debit Memorandum sent by buyers.

• Importance of specified details in return documentation.

Sales Transactions Overview

• Sales Discount: Applies under certain conditions to encourage timely payments.

• Sales Refunds/Returns: Seller policies crucial for handling returns.

Effects of Sales Transactions

• Document financial impacts of a cash sale and the associated costs.

Sales Transaction with Discount Effect

• Analyzes financials of selling merchandise, considering cost and discount terms.

Sales Taxes

• Liability arises at the point of sale; sellers collect and remit sales tax to authorities.

• Distinction made between cash and account sales regarding tax collection.

Dual Nature of Merchandise Transactions

• Highlight the buyer-seller dynamic in recording sales and purchases.

Multiple-Step Income Statement Format

• Structure includes sales, COGS, gross profit, and operating expenses outlined.

Example Multiple-Step Income Statement for Retail Company

• Breakdown of revenues, expenses, and resulting net income.

Example Single-Step Income Statement for Retail Company

• Simplified structure for reporting income and expenses.

Statement of Stockholders' Equity Example

• Displays changes in equity components over the year with net income and dividends.

Balance Sheet Example

• Comprehensive overview of assets, liabilities, and equity for TechSource.

Questions Section

• Q1: Find Sales Returns & Allowances given sales data.

• Q2: Calculate Cost of Goods Sold based on provided figures.