Account Exam 2
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merchindising consists of buying and selling products rather than services... merchanidiser is a business that sels merchanidise to customers
what are the differences between a service and merchanidise
b) income statement
a) a merchandising balance sheet also includes cash, short term investments, accounts receivable, prepaid items, as well as INVENTORY.
b) an income statement sheet adds sales revenue(rather than service revenue)costs of goods sold, and gross profit, both types of income statements includes expenses to find your net income
what is the operating cycle?
1. Cash: to by inventory
2. inventory: sell inventory
- 3. account recieveable: collect cash from customers
- then back to step 1
perodic and perpetual inventory systems
periodic: business does not keep record of inventory on hand. at end of period business takes a physical count and uses this info to prepare finacial statments.
perpetual: computerized inventory system in which business keeps constant running record of inventory and cost of goods sold.
journal entry for purchase of inventory
- Inventory(A+) debit
- accounts payable (l+) credit
- purchased inventory on account.
2/10: 2% discount if paid within 10 days
n/30: full amount due within 30 days
journal entry for disount
The entry to record payment within the discount period, debit Accounts payable for the full amount of the invoice. The discount is credited to Inventory because the discount for early payment decreases the actual cost paid for Inventory. Cash is credited for the amount of the invoice less the discount. The net amount paid is the actual cost of the inventory; therefore, crediting inventory reduces the inventory account to its actual purchase cost.
- If payment is sent after the discount
- period, Credit cash for the full invoice amount, but do not reduce the
- inventory account.
FOB shipping point
fob: free on board
shipping point: buyer owns inventory when shipped purchases pays freight charges debit inventory credit cash
destination: buyer owns inventory when goods arrive, seller pays freight, debit delivery expense credit cash.
Accounting for sales transactions
and sales returns
- requires two journal entries
- 1. record the sale whether cash or credit
- debit accounts receivable, credit sales revenue
- 2. update the inventory
- debit cost of goods sold, credit inventory
entry for sales discounts
sales discounts: customer pays within the discount period, seller has credit terms, reduce sales.
- Cash(A+) debit
- sales discount(6500 x 0.02) debit
- Account recieveable credit
- cash collection within the the discount period.
net sales equation
sales made to customers- sales and returns- sales discounts=net sales
gross profit or margin equation
net sales - cost of goods sold = gross profit
- physical count of inventory at least once per year
- boosks may differ from the books due to theft or errors
- cost of goods sold (debit)
- Inventory( credit)
- adjustment for inventory shrinkage.
closing entries for a merchandiser
- 1. close sales revenues to income summary
- 2. close expenses and contra revenues( cost of goods sold) to income summary(debit income summary)
- 3. close income summary to the retained earnings account(debit (income summary)
- 4. close divedends to the retained earnings(debit R.E)
net purchase equation
purchases(debit) - purchase discounts(credit) - purchase returns and allowances(credit) = net purchases
costs to transport purchased inventory are debited to freight in
- freight in
- paid a freight bill.
- begins with revenues: sales, costs of goods sold, and gross profit.
- then shows expenses
- to calculate net income.
selling and general
selling expenses: marketing and selling of products
general expenses: not marketing products
statement of retained earnings
retained earnings same as service company pg 280
- balance sheet
- - inventory account as current asset.
income statement formats
single step and multistep
single step: groups all revenues and all expenses together with no subtotals works for service companies
multi step: lists several important subtotals, gross profit, operating income
gross profit percentage calculation
gross profit/net sales revenue
- small increase may indicate rise in income
- decrease may indicate trouble
rate of inventory turnover
costs of goods sold/ average inventory
measures how rapidly inventory is sold, the higher the turnover the more quickly inventry is sold.
days in inventory
365 days/ inventory turnover ratio
- measures average number of days inventory is held
- the higher the days the longer invertory is held for
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