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Midterm 2 Ch. 5-8Chapter 5: Accounting for Merchandising OperationsI.Merchandising Options-Cost of Goods Sold:the total cost of merchandise sold during the period.a.Sales Revenue – COGS = Gross Profitb.Gross Profit – Operating Expenses = Net Income (Loss)c.Inventory + Purchases – Purchase Returns and Allowances and Purchasediscounts = Net Purchasesd.Freight-in is added to net purchases = Cost of Goods Purchasede.Less Ending inventory = COGSi.Operating Cycles: add inventory for merchandising companiesii.Flow of Costs – Perpetual and Periodic Inventory Systemsa.Beginning inventory + COGS = Cost of Goods Available for Saleb.Perpetual System: detailed records of the cost of each inventory purchaseand sale.-Determines COGS each time a sale occurs-More used for dealership-Inventory account would be debited when goods are purchased with the intentof being resoldc.Periodic System:do not keep detailed records throughout the period-Determines COGS only at the end of the accounting period. To determine COGSunder periodic:oDetermine cost of goods on hand at the beginning of the accountingperiodoAdd it to the cost of goods purchasedoSubtract cost of goods on hand at the end of the accounting period-Separate accounts are used to record freight-in costs, purchase returns andpurchase discounts under the periodic inventory system.-COGS under Periodic System:oBeginning Inventory + Purchases = Cost of goods available for sale –Ending Inventory= COGSiii.Advantages of Perpetual Systema.Provides better control of inventoryb.If there’s shortages, they can investigate immediatelyc.Computerized system can minimize the cost of extra clerksd.Able to control merchandise and manage day-to-day operations using aperiodic inventory systemII.Recording Purchases of Merchandise-Purchase invoice:indicates the total purchase price and other relevantinformation that support eachcreditpurchase.Dr. InventoryCr. Accounts Payable
i.Freight Costsa.FOB Shipping Point:seller places the goods, buyer pays freight costsDr. InventoryCr. Cashb.FOB Destination: seller pays freight costsDr. Freight-Out (Delivery Expense)Cr. Cashii.Purchase Returns and Allowances-The Purchase Returns and Allowances account is credited when merchandise isreturned under a periodic system.a.Purchase Return:Purchaser return goods to the seller for credit if salewas on credit or cash refund if sale was on cashb.Purchase Allowance:to keep merchandise if seller is willing to grant anallowance (deduction) form the purchase price.Dr. Accounts PayableCr. Inventoryiii.Purchase Discountsa.Purchase discount: Credit terms of a purchase may permit buyer to claima cash discount for prompt payment.Convert A/R to Cashb.Credit Terms:specify the amount of cash discount and time period inwhich is offered.