Ch 04 - LEARNING OBJECTIVE Distinguish activities financial...

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1 LEARNING OBJECTIVE 1 Distinguish activities & financial statements of a service business from a merchandising business.
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2 SERVICE VS. MERCHANDISING BUSINESS Service firms sell services Examples: Family Health Care, PC H&R Block LO 1 Continued
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3 SERVICE VS. MERCHANDISING BUSINESS Merchandising firms sell products Must buy products to sell Gross profit = Net sales – Cost of Goods Sold Examples: Home Depot Netsolutions K-Mart / WalMart HEB LO 1
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Accounts Used for Merchandise Sales Accounting Financial Statement Effect Account Purpose Income Statement Balance Sheet Sale Used to record sales revenue when a sale is made to a cash or credit customer Increase to net income (Through the Income Statement, indirectly increases retained earnings) Sales Returns & Allowances Used to record cash or credit refund given when customers return merchandise Decrease to sales and net income (Through the Income Statement, indirectly decreases retained earnings) Sales Discounts Used to record discounts granted to a customer for paying an account within a discount period (e.g., 2/10, net/30 terms) Decrease to sales and net income (Through the Income Statement, indirectly decreases retained earnings) Cost of Merchandise Sold Used to record the cost of inventory items sold to customers; as an “offset”, the inventory items sold are removed from the Merchandise Inventory Account Decrease to net income (Through the Income Statement, indirectly decreases retained earnings) Sales Tax Payable Used to record sales taxes collected from customers by the seller, who must remit the appropriate taxes to the tax authority (e.g., state or county) Increase in Liabilities (and increases Cash or Accounts Receivable) Merchandise Inventory
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