Ch 5 - Accounting for Merchandising Operations Flashcards
Gross profit is:
Sales revenue (net sales) - Cost of Goods Sold
A $750 purchase of merchandising inventory is made on June 13, terms 2/10, n30. On June 16, merchandise costing $50 is returned. What amount will be the payment in full on June 22?
A) $686
B) $700
C) $735
D) $750
A) 686. ($700 x 2% = $14).
When goods are shipped with the freight terms FOB shipping point in the perpetual inventory system:
A) The buyer pays the freight costs and debits Merchandising Inventory
B) The buyer pays the freight costs and debits Freight In
C) The seller pays the freight cost and debits Freight out
D) The seller pay the freight cost and debits Cost of Goods Sold.
A) The buyers pays the freight costs and debits Merchandising Inventory
Discounts offered to customers for early payment of the balance due:
A) will reduce the cost of the merchandise for the purchaser and increase the cost of goods sold for the seller
B) Reduce the cash paid by the purchaser, and the cash received by the seller, by the same amount
C) Are required by provincial law
D) Benefit the seller but generally do not benefit the purchaser
B) Reduce the cash paid by the purchaser and the cash received by the seller, by the same amount
To record the sale of goods for cash in a perpetual inventory system:
A) Only one journal entry is necessary to record the cost of goods sold and reduction of inventory.
B) Only one JE is necessary to record the receipt of cash and the sales revenue
C) Two JE’s are required; one to record the receipt of cash and sales revenue; and one to record the cost of goods sold and reduction of inventory
D) Two JE’s are necessary; one to record the receipt of cash and reduction of inventory, and one to record the cost of good sold and sales revenue
C)
The adjusted trial balance of White company reports a balance in sales of $18,000, Sales Discounts has a balance of $400, and Sales returns and allowances has a balance of $1500. White company's net sales would be equal to: A) $18000 B) $17,600 C) $16,100 D) $16,500
C) $16,100
Sales - Discounts - Returns/allowances
The sales in the accounting cycle for a merchandising company using the perpetual inventory system are the same as those for a service company except:
A) Closing JE are not required for a merchandising company
B) A post-closing trial balance is not required for a merchandising company
C) An additional adjusting entry in the case of any inventory shortages may be needed in a merchandising company
D) A multiple-step income statement is required for a merchandising company
C) An additional JE in the case of any inventory shortages may be needed in a merchandising company
Which of the following appears on both a single-step and multiple-step income statement for a merchandise company? A) Merchandise inventory B) Gross profit C) Profit from operations D) Cost of goods sold
D) Cost of goods sold
Net sales are $400,000, cost of goods sold is $310,000, operating expenses are $60,000 and other revenue are $5000. What are the gross profit margin and profit margin? A) 7.5% and 8.8% B) 22.5% and 7.4% C) 22.5% and 8.8% D) 77.5% and 8.8%
C) 22.5% and 8.8%
Under a periodic inventory system, when goods are purchased for resale by a company:
A) Purchases on account are debited to Merchandise Inventory
B) Purchases on account are debited to Purchases
C) Purchase returns are debited to Merchandise inventory
D) Freight costs are debited to Cost of Goods sold
B) Purchases on accounts are debited to Purchases
If beginning inventory is $60,000, purchases are $400,000, purchase returns and allowances are $25,000, freight in is $5000 and ending inventory is $50,000. What is the cost of goods sold? A) $385,000 B) $390,000 C) $410,000 D) $430,000
B) $390.000
Retailers vs Wholesalers
Retailers - sell direct to consumers
Wholesalers - sell to retailers
Calculating profit for service company
Revenue - operating expenses = profit(loss)
Do not have any cost of goods sold since they don’t sell any.
Calculating profit for Merchandising Company
Sales - Cost of goods sold = Gross profit.
Gross profit - operating expenses = profit (loss)
What is cost of goods sold
The total cost of the merchandise sold during the period. It is an expense directly related to revenue from the sale of the goods.
Perpetual inventory system vs periodic
Perpetual - keeps detailed records of each inventory purchase and sale
Periodic - do not keep detailed record. Cost of goods sold is determined only at the end of the accounting period via taking physical inventory count
How to determine cost of goods sold in periodic system?
- Determine beginning inventory (cost of goods on hand at beginning of period)
- Add the cost of goods purchased during the period
- Subtract the ending inventory (Cost of goods on hand at end - determined from physical inventory).
what happens when inventory items are sold under a perpetual inventory system?
Cost of goods sold (original purchase cost of merchandise) is transferred from the Merchandise Inventory Account (asset) to the Cost of Goods Sold account (expense).
Every time a sale occurs.
What is the Merchandise Inventory account used to record?
Goods purchased to sell to customers.
What is a subsidiary ledger?
A group of accounts that share a common characteristic (like all inventory accounts). It frees the general ledger from the details of individual balances.
Common for AR, AP, Inventory, Payroll
Ie merchandise inventory and accounts payable would have their own ledgers for each item it sells or for each account they are owe money to. This way it is easier to keep track.
What is the FOB point?
Free on Board.
The point where ownership is transferred. Can be expressed as FOB Destination or FOB Shipping point
FOB Shipping Point means? Who pays for shipping?
Ownership changes when the goods are placed on the carrier by the seller - the “shipping point”
The buyer pays the freight costs and is responsible for damages.
FOB Destination?
Ownership changes when goods are delivered to the buyer’s place of business - the “Destination”
Sellers pays freight and is responsible for damages.
What happens to the Merchandise Inventory account when the buyer pays for shipping? Why?
Merchandise Inventory gets debited for the cost of transportation. (increases M.I.)
This is because merchandise inventory should include all costs incurred to purchase merchandise, bring the goods to the buyer’s location, and prepare the goods for sale.
Purchase return vs purchase allowance
Return - purchaser returns goods.
Allowance - purchaser keeps the merchandise and seller grants an allowance (deduction) from purchase price
If a company returns goods that were for retail costing $300, how would that be recorded? (the purchaser)
What about if they were given an allowance instead?
Accounts payable 300
Merchandise inventory 300
Entry would be the same since even though no merchandise was returned, the company did not pay as much for the merchandise.
How is a purchase discount advantageous to both parties?
Purchaser saves money and seller shortens its operating cycle.
What does a credit term 2/10, n/30 mean?
Two ten, net thirty.
Means a 2% cash discount may be taken off the invoice price if payment is made within 10 days of the invoice date (the discount period). Otherwise, money is due in 30 days from invoice date.
Are quantity discounts recorded or accounted for separately?
What about purchase discounts?
No, quantity discounts are not.
Purchase discounts are. When invoice is paid within discount period, Merchandise Inventory account will be reduced by the amount of the discount because inventory is recorded at cost. By paying within the discount period, a company reduces the cost of its inventory.
Company pays wholesaler in full within the discount period. The $3500 balance owing has a 2% discount. Record the transaction
Accounts payable 3500
Merchandise inventory 70
Cash 3,430
For a merchandising company, how do you record a sale in a perpetual inventory system?
- Record sales revenue
Cash (or AR) xxxx
Sales xxxx
2. Records cost of merchandise sold
Cost of goods sold (expense account) xxx
Merchandise inventory (asset) xxx
Typically they won’t be the same amount.
Alternative name for Freight out?
Delivery expense
Transaction for a seller to pay for shipping would be?
Operating expense:
Freight out xxx
Cash xxx
Sales Returns and Allowances are considered what type of account?
Contra revenue account. Helps management keep track of both original sales and amount of sales and returns/allowances.
If a company returned $300 worth of merchandise (on account) to you, how would it be recorded?
Sales returns and allowances 300
Accounts receivable 300
If merchandise was not damaged and could be sold again, how would that be processed?
B) If goods are damaged, how is that processed?
Would need to debit Merchandise inventory account and credit cost of goods sold for amount it was worth
Merch. Inv 140
Cost of goods sold 140
B)second entry not required. Also not required when seller gives the buyer and allowance.
If a purchaser takes advantage of a sales discount, how would the seller record the transaction when it is paid?
Cash xxx
Sales discounts xxx
Accounts receivable xxx
How to calculate net sales?
Sales
Less: Sales returns and allowances
Less: Sales discounts
= Net sales
What are gross sales?
Total sales before deducting the contra revenue accounts (returns, discounts)
GST
PST
HST
define:
Goods and Services tax (federal)
Provincial sales tax
Harmonized sales tax (combination of GST And PST
Who pays GST/HST?
Who pays PST?
GST/HST paid by merchandising companies on the goods they purchase for resale.
PST only paid by the final consumer.
How are sales taxes on the sale of a good or service recorded as?
Liabilities. They are collected for government and therefore this money is owed to the gov.
If a company takes physical inventory at year end and finds that there are $500 of inventory missing, what would the JE for this be?
Cost of goods sold 500
Merchandise inventory 500
What is the profit from operations?
Gross profit - operating expenses
What are non-operating activities?
Other revenues/expenses not related to company’s main operations. Things like interest revenue, rental revenue, investment income, interest expense.
can show as either:
Net other non-operating revenues $1600
OR
Other revenue $3400
Other expenses $1800
Silver store reported the following information:
Sales $620,000; Sales returns and allowances $32,000; Sales Discounts $10,200; Cost of goods sold $422,000; Depreciation expense $10,000; Freight Out $5000, Interest expense $1700; Rent expense $15,000; Salaries Expense $80,000.
Calculate A) Net sales B) Gross Profit C) Total operating expenses D) Profit from operations E) Profit
A) Net sales $620,000 - 32000 - 10,200 = $577,800
B) Gross profit: $577,800 - 422,000 = $155,800
C) Total oper. exp: $10,000 + 5,000 + 15,000 + 80,000 = $110,000
D) Profit from operations: $155,800 - $110,000 = $45,800
E) $45,800 - $1700 = $44,100
Gross profit margin
Formula and what it shows
Gross profit / net sales = ___ %
The relationship between net sales and gross profit. Ie gross profit of $1M may sound impressive but if net sales is 50M, then gross profit margin is only 2%.
Profit Margin
Overall profitability in percentage form of each dollar of sales that results in profit
Profit / Net sales = Profit Margin ___%
For periodic systems - what is used instead of Merchandise Inventory?
Purchases expense account.
Normal balance debit
If CE uses a periodic inventory system, and purchases $3800 in goods, how would you JE?
Purchases 3800
Accounts payable 3800
If the buyer pays for freight costs, what is it called again? And how would the buyer journalize this for Periodic?
FOB shipping
Freight In 150
Cash 150
Freight in is an expense account. It is also part of the cost of goods purchased in periodic inventory.
(remember for perpetual it is also included in cost of goods sold)
How would a return be JE’d for periodic for a purchaser?
Since the Purchases is a DEBIT account, and the
Purchase Returns and Allowances is a contra expense account, it would be a CREDIT
Accounts payable xxx
Purchase returns and allowances xxx
If a seller uses period system, how would they JE the sale of the $3800?
Accounts receivable 3800
Sales 3800
No entry is required to record COGS or inventory at point of sale.
Periodic - how to calculate Cost of Goods Sold?
Beg. Inv + Cost of Goods Purchased* =
Cost of Goods available for sale - Ending inv.
= Cost of Goods sold
Cost of goods purchased* =
Purchases - purchase returns/allow. - discounts = Net purchases.
Net purchases + Freight In = Cost of goods purchased
PERIODIC: The following transactions occurred in Aug:
1 Superior buys Merch on account from cotton Company for $1000, terms 2/10, FOB Destination
1 Correct company pays freight charges of $70
3 Superior returns $150 of merch to Cotton and goods are returned to inventory
10 Superior Seating pays total amount owing
Record Superior’s transactions
1 Purchases 1000
Account payable 1000
1 No entry
3 Account payable 150
Purchases returns and all. 150
10 Account payable 850
Purchase discount 17
Cash 833PERIODIC: The following transactions occurred in Aug:
1 Superior buys Merch on account from cotton Company for $1000, terms 2/10, FOB Destination
1 Correct company pays freight charges of $70
3 Superior returns $150 of merch to Cotton and goods are returned to inventory
10 Superior Seating pays total amount owing
Record Cotton’s transactions
1 Accounts receivable 1000
Sales 1000
1 Freight out 70
Cash 70
3 Sales returns and allow 150
AR 150
10 Cash 833
Sales discounts 17
Ac Receivable 850
