Ch06 - Businesses After studying this chapter you should be...

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1 1. Distinguish between the activities and financial statements of service and merchandising businesses. 1. Describe and illustrate the financial statements of a merchandising business. After studying this chapter, you should be able to: 0 6 – Accounting for Merchandising  6 – Accounting for Merchandising  Businesses Businesses 1. Describe the adjusting and closing process for a merchandising business 1. Describe and illustrate the accounting for merchandise transactions including: purchase of merchandise sale of merchandise freight costs, sales taxes, trade discounts dual nature of merchandising transactions.
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2 Distinguish between the activities and financial statements of service and merchandising businesses. Objective 1 Objective 1 6-1 0 Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX 0
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3 When merchandise is sold, the revenue is reported as sales, and its cost is recognized as an expense called cost of merchandise sold . (this appears on the Income Statement) 6-1 0 Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory .(this appears on the balance sheet as a current asset)
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4 Describe and illustrate the financial statements of a merchandising business. Objective 2 Objective 2 6-2 0 The multiple-step income statement contains several sections, subsections, and subtotals. (Continued) Revenue from sales: Sales $720,185 Less: Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 NetSolutions NetSolutions Income Statement Income Statement For the Year Ended December 31, 2009 For the Year Ended December 31, 2009 0
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5 Operating expenses: Selling expenses: Sales salaries expense $53,430 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Delivery Expense 2,800 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240 Other income and expenses: Rent revenue $ 600 Interest expense (2,440 ) (1,840 ) Net income $75,400
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6 The Sales account provides the total amount charged to customers for merchandise sold, including cash sales and sales on account. Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise. Sales discounts are granted by the seller to customers for early payment of amounts owed. Net sales is determined by subtracting sales returns and allowances and sales discounts from sales.
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7 As we discussed earlier, sellers may offer customers sales discounts for early payment of their bills.
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