Merchandising Operations & Income Statement: Perpetual Inventory & Cost of Goods Sold, Study notes of Accounting

Download Merchandising Operations & Income Statement: Perpetual Inventory & Cost of Goods Sold and more Study notes Accounting in PDF only on Docsity! Revised Summer 2018 Chapter 5 Review 1 MERCHANDISING OPERATIONS AND THE MULTI-STEP INCOME STATEMENT LO 1: Describe merchandising operations and inventory systems.  Primary source of revenue for merchandisers like Walmart that buy and sell goods is referred to as sales revenue.  Cost of goods sold is the total cost of merchandise sold during the period. o It is an EXPENSE that is directly related to the revenue recognized from the sale of goods. Ex: Company C, a retailer, bought chairs from a wholesaler for $15 each. Company C then sold the chairs to their customers for $20 each.  The $20 represents Company C’s sales revenue for each chair.  The $15 that Company C spent on each chair represents Company C’s cost of goods sold and is recognized when each chair is sold to customers. ***Key Formula: Sales Revenue – Cost of Goods Sold = Gross Profit Revised Summer 2018 Chapter 5 Review 2 FLOW OF COSTS  Companies use either a perpetual inventory system or a periodic inventory system to account for inventory. 1. Perpetual: CONTINUOUSLY updates accounting records for merchandising transactions – SPECIFICALLY reduction of inventory and increasing cost of goods sold.  Advantages of perpetual inventory system. 1. Traditionally used for merchandise with high unit values. 2. Shows the quantity and cost of the inventory that should be on hand at any time. 3. Provides better control over inventories than a periodic system. 2. Periodic: updates the accounting records for merchandise transactions at the END OF A PERIOD.  Cost of goods sold determined by count at the end of the accounting period. ***Key Formula… Cost of Goods Sold = Beginning Inventory + Net Purchases – Ending Inventory Beginning Inventory 200,000$ Add: Purchases, net 900,000$ Goods available for sale 1,100,000$ Less: Ending Inventory 400,000$ Cost of Goods Sold 700,000$ Revised Summer 2018 Chapter 5 Review 5 Example Journal Entries Jay Company bought inventory from Z Company on January 1 for $10,000 under the credit terms 3/15, n/60. On January 10, Jay Company returned goods costing $1,000 to Z Company. Jay Company paid Z Company for the remaining goods on Jan. 12. What are the journal entries that need to be recorded in January for Jay Company? Date Debit Credit Inventory Jan. 1 10,000 Accounts Payable- Z Company 10,000 Accounts Payable- Z Company Jan. 10 1,000 Inventory 1,000 Accounts Payable- Z Company (10,000 – 1,000) Jan. 12 9,000 Inventory (9,000 × 3% = $270) 270 Cash 8,730 Revised Summer 2018 Chapter 5 Review 6 LO 3: Record sales under a perpetual inventory system. SALES RETURNS AND ALLOWANCES  Used when the seller either accepts goods back from a purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods.  Contra-revenue account on the income statement and has a Debit balance. SALES DISCOUNTS  Issued by the seller to obtain their money from the customer faster.  Contra-revenue account on the income statement and has a Debit balance. Sales Revenue – Sales Returns and Allowances – Sales Discounts = Net Sales Net Sales – Cost of Goods Sold = Gross Profit Revised Summer 2018 Chapter 5 Review 7 Example Journal Entries  Jay Company sold goods costing $6,000 to X Company for $10,000 on March 1 under the terms 2/10, net 30. On March 5, X Company returned goods to Jay Company with a selling price of $3,000 and a cost of $1,800. On March 10, Jay Company received payment from X Company for the remainder of the goods. What are the journal entries that need to be recorded on in March for Jay Company? Date Debit Credit Accounts Receivable- X Company Mar. 1 10,000 Sales Revenue 10,000 Cost of Goods Sold Mar. 1 6,000 Inventory 6,000 Sales Returns and Allowances Mar. 5 3,000 Accounts Receivable- X Company 3,000 Inventory Mar. 5 1,800 Cost of Goods Sold 1,800 Cash Mar. 10 6,860 Sales Discounts (7,000 × 2% = $140) 140 Accounts Receivable- X Company (10,000 -3,000) 7,000 Revised Summer 2018 Chapter 5 Review 10 LO 5: Determine cost of goods sold under a periodic inventory system.  No running account of changes in inventory.  Ending inventory determined by physical count.  Cost of goods sold not determined until the end of the period. Cost of Goods Sold = Beginning Inventory + Net Purchases + Freight-In – Ending Inventory ***Net Purchases = Purchases – Purchase Returns and Allowances – Purchase Discounts Revised Summer 2018 Chapter 5 Review 11 LO 6: Compute and analyze gross profit rate and profit margin. GROSS PROFIT RATE  Gross Profit = Net Sales Revenue – Cost of Goods Sold  Measures the margin by which selling price exceeds cost of goods sold.  Gross Profit Rate of 20% means that for every $1 of sales, a company keeps $0.20 after paying for their inventory (cost of goods sold) PROFIT MARGIN RATIO  Measures the extent by which selling price covers all expenses (including cost of goods sold).  Profit Margin Ratio of 20% means that for every $1 of sales, a company keeps $0.20 after paying for ALL expenses. QUALITY OF EARNINGS RATIO  A measure significantly less than 1 suggests that a company may be using more aggressive accounting techniques in order to accelerate income recognition.  A measure significantly greater than 1 suggests that a company is using conservative accounting techniques which cause it to delay the recognition of income.