Notes for chapter 05

Notes for chapter 05 - Notes for chapter 05 Accounting for...

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Notes for chapter 05 Accounting for merchandising business Measuring Net Income 1. A merchandiser is an enterprise that buys and sells goods to earn revenue. Merchandisers that purchase and sell directly to consumers are retailers, and those that sell to retailers are known as wholesalers. 2. The primary source of revenue for a merchandiser is sales revenue. Expenses are divided into two categories: (1) cost of goods sold and (2) operating expenses. 3. Sales less cost of goods sold is called the gross profit (or gross margin) on sales. For example, if sales are $5,000 and cost of goods sold is $3,000, gross profit is $2,000. 4. After gross profit is calculated, operating expenses are deducted to determine net income (or loss). 5. Operating expenses are expenses incurred in the process of earning sales revenue. Operating Cycles 6. The operating cycle of a merchandiser is as follows: Receive Cash Cash Buy Inventory Merchandise Inventory Sell Inventory Accounts Receivable Inventory Systems 7. A merchandiser may use either a perpetual or a periodic inventory system in determining cost of goods sold. a. In a perpetual inventory system, detailed records of the cost of each inventory item are maintained and the cost of each item sold is determined from the records when the sale occurs. b. In a periodic inventory system, detailed inventory records are not maintained and the cost of goods sold is determined only at the end of an accounting period. Purchase Transactions 8. Under the perpetual inventory system, purchases of merchandise for sale are recorded in the Merchandise Inventory account. For a cash purchase, Cash is credited; for a credit purchase, Accounts Payable is credited. 9. FOB shipping point means that goods are placed free on board the carrier by the seller, and the buyer must pay the freight costs. FOB destination means that goods are placed free on board at the buyer’s place of business, and the seller pays the freight. 1
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10. When the purchaser pays the freight, Merchandise Inventory is debited and Cash is credited. When the seller pays the freight, Delivery Expense or Freight-out is debited and cash is credited. This account is classified as an operating expense by the seller. 11. A purchaser may be dissatisfied with the merchandise received because the goods may be damaged or defective, of inferior quality, or not in accord with the purchaser’s specifications. The purchaser may return the merchandise, or choose to keep the merchandise if the supplier is willing to grant an allowance (deduction) from the purchase price. When merchandise is returned, Merchandise Inventory is credited. 12.
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Notes for chapter 05 - Notes for chapter 05 Accounting for...

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