Chapter 5 Study Guide

Chapter 5 Study Guide - CHAPTER 5 Accounting for...

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CHAPTER 5 Accounting for Merchandising Operations STUDY OBJECTIVES 1. IDENTIFY THE DIFFERENCES BETWEEN SERVICE AND MERCHANDISING COMPANIES. 2. EXPLAIN THE RECORDING OF PURCHASES UNDER A PERPETUAL INVENTORY SYSTEM. 3. EXPLAIN THE RECORDING OF SALES REVENUES UNDER A PERPETUAL INVENTORY SYSTEM. 4. EXPLAIN THE STEPS IN THE ACCOUNTING CYCLE FOR A MERCHANDISING COMPANY. 5. DISTINGUISH BETWEEN A MULTIPLE-STEP AND A SINGLE-STEP INCOME STATEMENT. 6. EXPLAIN THE COMPUTATION AND IMPORTANCE OF GROSS PROFIT. *7. EXPLAIN THE RECORDING OF PURCHASES AND SALES OF INVENTORY UNDER A PERIODIC INVENTORY SYSTEM.
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*8. PREPARE A WORKSHEET FOR A MERCHANDISING COMPANY.
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CHAPTER REVIEW Measuring Net Income 1. (S.O. 1) A merchandising company is an enterprise that buys and sells goods to earn revenue. Merchandising companies 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 merchandising company 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 merchandising company is as follows: Receive Cash Cash Buy Inventory Merchandise Inventory Sell Inventory Accounts Receivable Flow of Costs 7. A merchandising company 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. (S.O. 2) 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.
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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.
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Chapter 5 Study Guide - CHAPTER 5 Accounting for...

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