Chapter 5 Flashcards
Revenue
come from sales of merchandise as the MAIN SOURCE
How do we measure income for a merchandising company
Sales- COGS= Gross Profit
Gross Profit- Operating Expenses= Income before income tax
Income Before income Tax- Income tax= net income
Formula for gross profit
Sales-COGS
Income measurement process for a service company
Sales- Operating Expenses= Income before tax
Income before tax- income tax expense= net income
How do we determine how many goods are avilable for sale
beginning inventory + cos of goods purchased during the period
What is ending inventory?
goods left over (not sold)
what is the flow of costs for a merchandising company
(how do we find cog available for sale) (how do we find the two distinctions of cog available for sale)
beginning inventory+ cogs purchased= cogs available for sale
cost of goods that are still available for sale= this will be recorded in two ways:
A) COGS (stamement of income since this is an expense)
B) Ending Inventory (SOFP as this is a current asset)
How do we separate the cost of goods available for sale?
Into 2 categories:
a) SOI: COGS EXPENSE
b) SOFP: ENDING INVENTORY
A) IS FOR ALL THE GOODS SOLD
B) FOR ALL THE GOODS NOT SOLD
Perpetual Inventory System
detailerd records must be kept, they are continuously updated
how often do people do a physical count of inventory
at least once a year
how to determine the ending inventory under a perpetual inventory system
begiining inventory+ cogs purchased= cogs available for sale
cogs avilable for sale- cogs= ending inventory
how often is cogs determined
at each sale
Periodic inventory system
detailed recrods of merch are not kept throughout the period (management does not know the ending inventory during the accounting period)
how is inventory determined in the periodic inventory system
only once it is counted
difference between periodic inventory system and perpetual inventory system
PERIODIC: count is done only at the end of period
PERPETUAL: count is done always
How to determine cogs under periodci inventory system?
begiining inventory+ cogs purchased= cogs available for sale
cogs avilable for sale- ending inventory=cogs
Perpetual vs Periodic which is better?
Cost benefit analysis
1)perpetual is more expensive but more information
2) periodic is cheaper but less information
perpetual inventory system: how do you record purchases of merchandise
recorded in the inventory account
GST AND HST NOT INCLUDED IN COGS
!!!
fob
fre eon board-
this is where title or ownership of goods transfers!
FOB DESTINATION: buyers place of business (seller pays for shipping)
FOB Shipping point:seller place of business (buyer pays for shippin))
FOB destination
Ownership of the goods does not pass from the seller to
the buyer until the goods are received by the buyer
seller owns goods during shipping
Fob shipping point
ownership of the goods passes from the seller to buyer as soon as goods are purchased
buyer owns goods during shipping
purchase returns and allownaces
purchaser returns the goods to the seller and receibves a cash/refund/credit
Purchase discount
offered to encourage early paymbet of a balance due
EX: 2/10 n/30 (2/10 net 30)
If buyer pays within 10 days, they get a 2% discount
If a buyer pays after 10 days but within 20 days (0 discount)
what is shrinkage
when there is less inventory on hand as compared to records! this should be investigaeted
how to record shrinkage in JE
debit to cogs expense and credit to inventory
one advantage of eprpetual inventory system
you can determine inventory shrinkage
under perpetual inventory system when you are recording sales, how many entries are required
2
1) recird sales revenue:
Cash or A/R
Sales
Refund LIabilitity
2) record costs of merchandise sold
Cost of Goods Sold
Estimated inventory returns
Inventory
What account do we record retunrs to
Estimated Inentory Returns (this is an asset account)
Two types of statement of income
single step and multi step
single step soi
all data classiied into two categories revenues and expenses; less subtotals and summaries
multiple step soi
shows severak steos in determining net income or loss
1) Gross profit
2) income from operations
3) income before income tax
4)net income:
what companies would have interest income or interest expense
for a bank/financial instutiton this will be in OPERATING EXPENSE
for another sort of company it would in OTHER INCOME/EXPESNES
Statement of comprehensive income
items not inluded in net income, but in the broader catefory of comprehensive income
Gross Profit Margin
gross profit/sales
higher is better
ratio –:–
Profit Margin
Net Income/sales
higher is generally better
ratio –:–
Buyer: purchase of 3500 of inventory for cash
Dr Inventeory 3500
Cr Cash 3500
Buyer: return of 750 of inventory to seller for credit on account
Dr acc payable 750
Cr inventory 750
buyer: purchase of 4000 inventory on account
dr inventory 4000
cr a/p 4000
terms don’t really matter
buyer: payment of 400 cash for foreign on purchase of inventory (fob shipping point)
dr inventory 400
cr cash 400
buyer: payment of amount owed for purchase of 3500 inventory terms 2/10 n/30 paid within discount period
Dr ap 3500
cr inventory 70 (2% of 3500)
cr cash 3430
