Screen Shot 2019-11-08 at 10.07.14 PM.png - Cost of goods o Sold is the total cost of merchandise sold during the period Companies use either a

Screen Shot 2019-11-08 at 10.07.14 PM.png - Cost of goods o...

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Unformatted text preview: Cost of goods o Sold is the total cost of merchandise sold during the period Companies use either a perpetual inventory system or a periodic inventory system to account for inventory Perpetual system o Maintain detailed records of the cost of each inventory purchase and sale O Records continuously show inventory that should be on hand for every item O Company determines cost of goods sold each time a sale happens O Advantages: Traditionally used for merchandise with high unit value Shows the quantity and cost of the inventory that should be on hand at any time Provides better control over inventories than a periodic system . Periodic system o Do NOT keep detailed records of the goods on hand o Cost of goods sold determined by count at the end of the accounting period o Cost of goods sold = Beginning inventory Add: purchases, net total Less: Ending inventory Cost of goods sold Purchase return: o Return goods for credit if the sale was made on credit, or for cash refund if the purchase was cash Purchase allowance: o May choose to keep the merchandise if the seller will grant a reduction of the purchase price Credit terms may permit buyer to claim a cash discount for prompt payment Advantages: Purchaser saves money Seller shortens the operating cycle by converting the accounts receivable into cash earlier Purchase discounts: 2/10, n/30 " 2% discount if paid within 10 days, otherwise net amount due in 30 days 0 1/10 EOM 1% discount if paid within the first 10 days of next month o n/10 EOM Net amount due within the first 10 days of the next month Gross profit rate May be expressed as a percentage by dividing the amount of gross profit by net sales Gross profit rate = gross profit/Net sales o Causes of decline in the gross profit rate Selling products with a lower markup Increased competition may result in a lower selling price Company forced to pay higher prices to its suppliers without being able to pass these costs on to its customers Profit margin measures the percentage of each dollar of sales that results in net income o Profit margin=net income/net sales Gross profit rate o Measures the margin by selling price exceeds cost of goods sold . Profit margin ratio o Measures the extent by which selling price covers all expenses (including cost of goods sold) . Quality of earnings ratio = net cash provided by operating activities Net income...
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  • Spring '14
  • BrigidA.Schaffer

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