Acct 2121 CHPT 5 Flashcards
What are Service Businesses?
Perform services as their primary source of revenue
Such as: hairdressers, restaurants, and nail techs
What are Merchandising Businesses?
Merchandisers buy and sell inventory
Such as: grocery store, and clothing stores
Merchandiser Revenue?
Generated from the sales of product
Merchandiser expenses?
Cost of goods sold, operating expenses
Gross profit equation?
sales- cost of goods sold
Income (Loss) before income Tax equation?
Gross profit- operating expense
Net Income equation?
Income before Income Tax- Income tax expense
How to track movement of inventory?
Beginning Inventory+ Purchases- sales =ending inventory ( sales of inventory = Cost of goods sold)
Two Inventory systems?
Perpetual inventory system, Periodic inventory system
What are perpetual inventory systems?
Detailed records are kept for cost of each purchase and sale, records are updated continuously, physical count is done once per year to adjust perpetual records to actual
what are Periodic inventory systems?
Detailed records are NOT kept throughout the period, COGS can only be determined at the end of the period once inventory is counted, (COGS= Actual count- ending inventory)
Ending Inventory in perpetual Inventory System Equation?
Beginning Inventory+ Cost of goods purchased= Cost of goods Available for sale - Cost of goods sold ( determined at each sale) = Ending inventory
What happens in purchase of Merchandise?
All purchases are recorded in the inventory account, Includes freight and applicable taxes, Less purchase returns, allowances, discounts, can be made for cash or credit
What is cost of goods purchased?
total of all costs
What are sales taxes?
GST and HST paid does not form part of the cost of goods (as it is refunded to the government), Generally no PST on goods purchased for resale
who deals with FOB destination?
ownership transfers once product reaches the buyer’s place of business; Seller pays for shipping
Who deals with FOB shipping point?
Ownership transfers once it leaves seller’s place of business; buyer pays for shipping, If buyer pays- ADD to cost of inventory
What are Purchase Returns?
A purchaser returns the goods to the seller and receives a cash refund or credit, buyer can choose to keep the merchandise if the seller is willing to give a deduction to purchase price, result in decrease to cost of goods purchased
What is a quantity discount?
gives a price reduction according to the volume of the purchase (Not recorded separately- discount price is recorded as cost of purchase)
What is a purchase discount?
is offered to encourage early payment of a balance due. ( Ex 2/10, n 30), recorded separately when payment made, Results in a decrease to inventory account
What are Adjusting Entry at End of period?
Inventory counts must be done at the end of the period, normally any differences results in less inventory on hand when compared to inventory records, this is often referred to as shrinkage and should be investigated, adjustments for shortages result in a increase to COGS and a decrease to inventory
What are sales of merchandise?
Record sales revenue, Record impact on inventory/cost of the sale, when freight is FOB destination, seller records cost of freight as an operating expense
What are Sales Discounts/ Returns?
Under ASPE, sales are recorded at their full mount and no estimate of sales returns is made, sales returns are recorded when they occur, Credit can be to a Sales Returns account- a contra account to sales, sales discount are a contra revenue account to sales
What two entries are required for sales discounts/ Returns?
recognize the reduction in sales and accounts receivable, recognize the return of the goods to inventory and decrease in cost of goods sold
Two types of Statement of income presentation?
Single-step, multiple-step
What is a single-step statement of income?
all data classified into two categories revenues and expenses
What is a multi-step statement of income?
shows several steps in determining net income or loss
Determine Net income with multi step?
Gross profit= Sales - cost of goods sold, Income from operations= gross income - operating expenses, income before income tax= income from operating expenses- non-operating expenses, Net income income before tax income- income tax expenses
What are two types of business?
Service Business, Merchandising Business