ac101_ch4 - Revised July 2008 ACC101 CHAPTER 4 Accounting...

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Revised July 2008 Page 1 of 15 ACC101 – CHAPTER 4 Accounting for Merchandising Operations
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Revised July 2008 Page 2 of 15 Key Terms and Concepts to Know Income Statements: Single-step income statement Multiple-step income statement Gross Margin = Gross Profit = Net Sales – Cost of Goods Sold Gross Margin ratio = Gross Margin / Net Sales Operating Cycle: Purchase merchandise from vendors for inventory on account or for cash Sell inventory to customers on account Collect cash from customers Pay cash to vendors Repeat again and again Note that these steps overlap so that the cash collections from customers may occur after the cash payments to vendors. Merchandise Inventory: Merchandise Inventory (Inventory or MI) refers to the goods the company has purchased and intends to sell to others. Inventory is a current asset since the company intends to sell it within one year. Cost of Goods Sold: Inventory that has been sold becomes an expense, Cost of Goods Sold, in the period of sale. Inventory Systems: Perpetual Inventory System records all inventory transactions as they occur in the Merchandise Inventory account. Perpetual Inventory System records all purchase-related inventory transactions as they occur in separate accounts and records the cost of goods sold only at the end of the period. Shrinkage is the cost of inventory not on hand and not sold. It is part of cost of goods sold under either inventory system. Purchasing Transactions: Inventory account is increased for the cost of the merchandise purchased plus the freight cost necessary to transport the inventory to the buyer’s place of business (FOB shipping point). Inventory account is decreased for the cost of the merchandise returned to the seller, allowances received from the seller and any cash discounts taken. Inventory is always recorded at the final cost to the buyer.
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Revised July 2008 Page 3 of 15 Trade discounts are deducted as part of the initial purchase transaction; they are not a purchase discount. Sales Transactions: Inventory account is decreased and cost of goods sold is increased for the cost of the merchandise sold. Inventory account is increased and cost of goods sold is decreased for the cost of the merchandise returned by the seller. The freight cost necessary to transport the inventory to the buyer’s place of business is an expense in the period of sale (FOB Destination). The selling price of the merchandise sold represents revenue to the seller and is recorded in a separate transaction. Trade discounts are deducted as part of the initial sale transaction; they are not a sales discount. Transportation Costs: FOB Shipping Point – Purchaser is responsible for paying the shipping charges. They are usually prepaid by the seller and added to the invoice. Buyer adds the shipping costs to inventory. If seller prepays, seller has a receivable from buyer.
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