ch. 5 - Chapter 5 - Study Objectives After studying this...

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Financial Accounting - Chapter 5 1 Chapter 5 - Study Objectives After studying this chapter, you should be able to: 1. Identify the differences between a service enterprise  and a merchandising company. 1. Explain the recording of purchases under a  perpetual inventory system. 1. Explain the recording of sales revenues under a  perpetual inventory system. 1. Distinguish between a single-step and a multiple- step income statement. 2. Determine cost of goods sold under a periodic  system. 1. Explain the factors affecting profitability.
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Financial Accounting - Chapter 5 2 Merchandising Operations The goods that a merchandising company sells to its customers  are called inventory.  They purchase their products in a  ready- to-sell   conditions, and they either sell their products to the final  consumers (retailers) or other retailers (wholesalers). When the inventory (asset) is sold, the cost of the inventory sold  becomes an expense called  cost of goods sold.    Therefore, the  operating cycle   of a merchandising company is the  time it takes to go from a position of cash, obtain inventory, sell  the inventory for cash or a receivable, and then convert the  receivable back into cash.  The purchase of inventory and  eventual sale makes the operating cycle longer for  merchandising company.
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Financial Accounting - Chapter 5 3 Inventory Tracking Systems This relates to the type of accounting system a  company has set up to track inventory  coming into and leaving the company.   The system used has a major effect on the  accounting process that occurs related to  inventory.  There are two types: 1. Periodic Inventory System 1. Perpetual Inventory System 
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Financial Accounting - Chapter 5 4 Periodic Inventory System In a  periodic inventory system,  cost of goods  sold is not tracked during the period.  Instead,  a year-end physical count is required to  determine the number of units in ending  inventory.  After the physical inventory is  taken, the cost of ending inventory is  computed and cost of goods sold is  determined indirectly.  
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Financial Accounting - Chapter 5 5 Perpetual Inventory System In a  perpetual system,  purchases and sales of  inventory are tracked continuously.  Thus, cost of  goods sold and ending inventory can be determined  at any point in time.   While cost of goods sold and ending inventory are  tracked continuously under a perpetual system, a  year-end physical count is still necessary to  determine if any items are missing. The combination of a perpetual system and a year-
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This note was uploaded on 04/14/2008 for the course ACCT 201 taught by Professor Romney during the Fall '06 term at San Diego.

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ch. 5 - Chapter 5 - Study Objectives After studying this...

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