Chapter 5 Flashcards
Merchandise Inventory
- Purchased for resale
- For higher price
Methods of merchandise inventory
- Periodic
- Perpetual
- They refer to how often the inventory account is verified and updated to reflect on the current value at hand
Periodic System
- Inventory only counted 1 a year
- Result is used for calculation COGS
- No merchandise inventory account
- Instead: Purchases, R & A, discounts
- Calculates COGS at the end of the fiscal year
Perpetual System
- Inventory counted every time a purchase and/or sale is made
- Uses Merchandise inventory
- (not purchases)
- Calculates COGS every time
Freight Costs
FOB shipping point
- Buyer has to pay shipping costs
- Debit merch inv
FOB Destination
- Seller pays shipping costs
- Debit Freight-out
- Credit Cash
Calculating Cost of Goods Purchased
Purchases + Freight In - Purchases R & A - Purchase Discounts
Calculating Cost of Goods on Hand
Based on physical inventory at the beginning (Beginning Inventory) =
Calculating COGS
(Beginning Inventory + Cost of goods Purchased) + Freight-in = Cost of goods available for sale - ending inventory = COGS
Accounts to remember
Merchandise Inventory = Current Asset
Sales = Revenue
Sales R & A = Expense
Sales Discount = Expense
Purchases = COGS / Expense
Purchase R & A = Revenue
Purchase Discount = Revenue
Freight-in = Expense
What are merchandising operations? (perpetual)
- purchasing products to resell
Revenue account: - Sales (mainly from merchandise sales)
Expense accounts: - COGS: cost of merch sold
- Operating expenses: Added in the process of earing revenue
Gross Profit: - Difference between Sales and COGS
Which companies would chose which system?
Big companies:
- Perpetual
- Need to keep track of transactions
ex. Amazon
Small companies:
- Periodic system
- No need to track transactions every time if not many transactions
Profitability ratios
-Measure profit or operating success for a specific time period
- Gross profit margin
- Profit margin
Gross profit margin
Gross Profit / Net sales = %
- measures effectiveness of a company’s purchasing and pricing policies
(Net sales - COGS) = Gross profit
Profit margin
Profit / Net sales = % of sales that result in profit
- Measures ability of a company to cover all expenses and provide a return to owners
- And how effectively a company can convert sales into net income
When to use gross profit margin
- To see how to beat your competitors
- to see how well they are doing
When to use profit margin
- To find if profits are high enough to distribute dividends
- To pay back its loans
- Low profit margin = expenses too high
Completing accounting cycle
- Add one adjustment for inventory
- To ensure the recorded inventory amount has the same amount of goods as the actual quantity at hand
Physical count (in the cycle)
- Perpetual indicates what SHOULD exist
- But an inventory count shows what DOES exist
Additional accounts to be closed (in the cycle)
- Sales
- Sales R & A
- Sales Discounts
- COGS
- Freight - out
What are the 2 types of income statements?
- Single step
- Multi step
Single step
Categories classified as Revenue and expenses
- Revenues : Net sales, interest revenue, rent revenue etc.
- Expenses: COGS, operating expenses…., Dep exp, freight out, Insurance exp, interest exp
Multi step
5 steps involved:
1. Net sales = Sales - R & A + Discounts
2. Gross profit = Net sales - COGS
3. Profit from operations = Gross profit - operating expense
4. Non operating activities
5. Profit = Profit from operations + non operating activties
