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Accounting - Chapter 5 and 6 notes

Accounting - Chapter 5 and 6 notes - Accounting Chapter 5...

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Accounting – Chapter 5 – Notes Merchandising Firms – 2 categories: - Retail Firms (Retailers) - Target and Office Depot – Buy merchandise to sell to customers. - Wholesale Firms – Sell products to retail firms. Sales Revenue (sales) - Revenue that merchandising firms make. Cost of goods sold - Total cost of merchandise. Gross profit (gross margin) - Difference between sales revenue and cost of goods sold. Operating cycle – series of business activities that describes how a company takes cash and turns it into more cash. Acquiring goods it plans to sell – Important activity for merchandising firms. Merchandise inventory – All goods owned and held for sale in the regular course of business. Only the items a firm sells are considered inventory. Information system is the way a firm records and reports its transactions, including inventory and sales. A merchandising firm’s inventory is a current asset until it is sold. Inventory should be expensed in the period which it is sold. When inventory becomes an expense – Cost of goods sold. Process of acquiring inventory begins when someone decides to order merchandise. - Someone sends a Purchase requisition to purchasing agent. - Purchase agent specifies a Purchase order to a vendor with prices, and delivery time. o One copy to receiving department, one to accounts payable. o The receiving department will let AR know when merchandise arrives. o AR will pay for goods when it receives invoice from vendor to match with PO. Recording Purchases of Inventory Transactions: 2 ways to record purchases of inventory transactions: - Perpetual Inventory System – Updating the accounting records at the time of every purchase, sale, and return. o The accountant will remove the cost of the item (the cost of goods sold) from the inventory account each time an item is sold. - Periodic Inventory System – Updating the accounting records only at the end of the accounting period. Freight: The cost a company records in its inventory account is not always the amount quoted by the vendor because of shipping costs. - When a merchandiser pays for transportation costs for good purchased, freight cost called Freight in and is considered part of the cost of the inventory. - If terms are free on board (FOB) shipping point , title of the goods passes to the buyer at the shipping point (vendor’s warehouse), and cost of transport is buyer’s responsibility.
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