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Exam2StudyGuideFinAccounting

Exam2StudyGuideFinAccounting - Chapter 5 Accounting For...

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Chapter 5- Accounting For Merchandise Retailer: merchandising company that sells to consumers Wholesaler: merchandising company that sells to retailers Sales (revenue) : source of revenue for merchandising company Costs of goods sold : total cost of merchandise during the period This expense is directly related to the revenue recognized from the sale of goods Merchandise Inventory : current asset account Income Measurement Process for a Merchandising Company... Gross Profit = Sales Revenue - Cost of goods sold Net Income = Gross Profit - Operating expenses Operating Cycle of a Merchandising Company Buy Inventory --> Merchandise Inventory --> Sell Inventory --> Accounts Rec. --> Receive Cash --> and cycle starts again Operating Cycle of a Service company Perform Services--> Accounts Receivable --> Receive Cash--> Cash Inventory Systems 1. Perpetual: detailed records of the cost of each item are maintained, and the cost of each item is determined from records when the sale occurs When item sold … - Time item is sold: Record revenue AND compute and record cost of goods sold - End of the Period: No entry 2. Periodic : cost of goods sold is determined only at the end of an accounting period. To determine the COST OF GOODS SOLD: - Determine cost of goods on hand at the beginning of the accountings period - Add to it cost of goods purchased - Subtract the cost of goods on hand at the end of the accounting period (Cost of goods on hand initially, + Cost of goods sold - cost of goods not sold) - Time item sold: Record revenue ONLY - End of Period: Compute and record costs of goods sold Ex: Best Buy buys stereos from Sony on account. This is how it is recorded (from Best Buy-The buyer’s perspective): Merchandise Inventory 3800 Accounts Payable 3800 (To record goods purchased on account from Sony)
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Freight Costs FOB Shipping Point (buyer pays-so inventory cost includes its shipping cost ) Merchandise Inventory 150 Cash 150 (To record payment of freight on goods purchased) FOB Destination (seller pays-so operating expense to seller) Freight-out (Delivery Expense) 150 Cash 150 (To record payment of freight on goods sold) Purchase Returns and Allowances (From buyer’s perspective) Purchase return : return goods to seller, get back cash or credit, depending on how purchaser paid Purchase allowance : seller gives discount from purchase price (ex: for a damaged product that buyer still wants to keep) Ex: If Best Buy is returning a stereo bought from Sony, they will debit accounts payable because they no longer owe money to Sony, and will also credit their inventory because they no longer have the stereo. (Shown works for purchase return and purchase allowance) Accounts Payable 300 Merchandise Inventory 300 (To record return of good received from Sony) Purchase discount : If a buyer buys something on credit, and they make that payment on time… a seller may give the buyer a cash discount for prompt payment Ex: If Best Buy buys inventory from Sony on credit, and pays Sony within the 10 day time span to earn the purchase discount, Best Buy records that transaction like so: Accounts Payable 3500 Cash 3430
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