Review Notes Ch 5

Review Notes Ch 5 - CHAPTER 5 Merchandising Operations and...

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CHAPTER 5 Merchandising Operations and the Multiple-Step Income Statement Study Objectives 1. Identify the differences between a service enterprise and a merchandising company. 2. Explain the recording of purchases under a perpetual inventory system. 3. Explain the recording of sales revenues under a perpetual inventory system. 4. Distinguish between a single-step and a multiple-step income statement. 5. Determine the cost of goods sold under a periodic inventory system. 6. Explain the factors affecting the profitability. 7. Identify a quality of earnings indicator. 8. (Appendix) Explain the recording of purchases and sales of inventory under a periodic inventory system. 5-1
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Chapter Outline Study Objective 1 - Identify the Differences Between a Service Enterprise and a Merchandising Company. In a merchandising company , the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales . Unlike expenses for a service company, expenses for a merchandising company are divided into two categories: Cost of goods sold - the total cost of merchandise sold during the period. Operating expenses - selling and administrative expenses. The operating cycle of a merchandising company ordinarily is longer than that of a service company. The purchase of merchandise inventory and its eventual sale lengthen the cycle. Steps in the operating cycles for a service company and a merchandising company: Service Company Merchandising Company Perform Services Buy Inventory (Cash or Accounts Payable) Bill Customers (Accounts Receivable) Sell Inventory Collect Cash from Accounts Receivable Bill Customers (Accounts Receivable) Collect Cash from Accounts Receivable Merchandising companies use one of two systems to account for inventory Perpetual – Detailed records of the cost of each inventory purchase and sale are maintained and the records continuously show the inventory that should be on hand for every item. Under a perpetual system, a company determines the cost of goods sold each time a sale occurs. For control purposes, companies take a physical inventory count to verify the accuracy of the inventory records. 5-2
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Periodic – Detailed records of the goods on hand are not kept throughout the period. A physical inventory is taken at the end of the accounting periods to determine cost of goods on hand as well as cost of goods sold. Study Objective 2 - Explain the Recording of Purchases under a Perpetual Inventory System. The purchase of merchandise for resale is normally recorded by the merchandiser when the goods are received from the seller. Every purchase should be supported by business documents that provide written evidence of the transaction. Every cash purchase should be supported by a canceled check or a cash
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Review Notes Ch 5 - CHAPTER 5 Merchandising Operations and...

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