Chapter 5 Flashcards
Merchandising companies
Buy and sell merchandise rather than perform services as their primary source of revenue
- Wholesaler: sells to retailers
- Retailers : purchase and sell directly to consumers
Primary source of revenue and expenses for merchandising companies
Sale of merchandise - sales revenue or sales
Cost of goods sold and operating expenses
Cost of goods sold
Total cost of merchandise sold during the period
Operating expenses
Expenses incurred in the process of earning sales revenue
Perpetual inventory system
Companies keep detailed records of the cost of each inventory purchase and sale
- A company determines the cost of goods sold each time a sale occurs
Advantages:
–> Provides better control over inventories
–> A computerised system can minimise the cost of the clerical work and expense to maintain the records
Periodic inventory system
Companies don’t keep detailed inventory records of the goods on hand throughout the period, but they do it at the end of the accounting period only
To determine the cost of goods sold under a periodic inventory system, these steps are needed:
–> Determine the cost of goods on hand at the beginning of the accounting period
–> Add it to the cost of goods purchased
–> Subtract the cost of goods on hand as determined by the physical inventory count at the end of the accounting period
Many small businesses find it unnecessary to invest in computerised systems, and find that they can manager their merchandise using a period inventory system
Companies purchase inventory using — and they record the purchases when —
cash or credit
They receive the goods from the seller
Purchase invoice
Should support each credit purpose - this invoice indicates the total purchase price and other information
The purchaser uses as a purchase invoice a copy of the sales invoice sent by the seller
To record the purchase you
Debit inventory
Credit cash/accounts payable
Companies recognise the revenue when —
The performance obligation is satisfied
Following the revenue recognition principle
Business document
Should support every sales transaction to provide written evidence of the sale
–> Cash register documents provide evidence of cash sales
Sales invoice
Should support each credit sale
–> The original copy goes to the customer and the seller keeps a copy for use in recording the sale
Recording sales of Merchandise in two steps
- Record the sale - how much he earned
- seller debits cash and credits sales revenue - Records the cost of the merchandise sold - how much he paid
- seller debits cost of goods sold and credit inventory for the cost of those goods sold
Gross profit formula
Sales revenue - COGS
Net income formula
Gross profit - Operating expenses
