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Chapter5Outline - CHAPTER REVIEW Measuring Net Income 1(S.O...

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CHAPTER REVIEW Measuring Net Income 1. (S.O. 1) A merchandiser is an enterprise that buys and sells goods to earn a profit. Merchand- isers 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 merchandiser 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 merchandiser is as follows: Receive Cash Cash Buy Inventory Merchandise Inventory Sell Inventory Accounts Receivable Inventory Systems 7. A merchandiser 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 pur- chase, Accounts Payable is credited. 9. A purchaser may be dissatisfied with the merchandise received because the goods may be dam- aged or defective, of inferior quality, or not in accord with the purchaser's specifications. The pur- chaser may return the merchandise, or choose to keep the merchandise if the supplier is willing to grant an allowance (deduction) from the purchase price. When merchandise is returned, Mer- chandise Inventory is credited.
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10. When the credit terms of a purchase on account permits the purchaser to claim a cash discount for the prompt payment of a balance due, this is called a purchase discount. If a purchase dis- count has terms 3/10, n/30, then a 3% discount is taken on the invoice price (less any returns or allowances) if payment is made within 10 days. If payment is not made within 10 days, then there is no purchase discount, and the net amount of the bill is due within 30 days. 11. When an invoice is paid within the discount period, the amount of the discount is credited to Mer- chandise Inventory. When an invoice is not paid within the discount period, then the usual entry is made with a debit to Accounts Payable and a credit to Cash. 12.
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Chapter5Outline - CHAPTER REVIEW Measuring Net Income 1(S.O...

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