chapter 5 Flashcards
What is the main difference between service and merchandising companies?
Service companies generate revenue by performing services, while merchandising companies buy and sell inventory.
What is the difference between retailers and wholesalers?
Retailers sell to customers, while wholesalers sell to retailers.
What is the operating cycle of a service company?
Cash → Perform Services → Accounts Receivable → Collect Cash.
What is the operating cycle of a merchandising company?
Cash → Purchase Inventory → Sell Inventory → Accounts Receivable → Collect Cash.
What are the two categories of expenses for a merchandising company?
Cost of Goods Sold and Operating Expenses.
What is Cost of Goods Sold (COGS)?
The cost of acquiring the inventory that was sold during the period.
What is the formula for calculating Cost of Goods Sold (COGS)?
COGS = Beginning Inventory + Cost of Goods Purchased - Ending Inventory.
What are the two types of inventory systems?
Periodic and Perpetual inventory systems.
How does the periodic inventory system work?
Inventory records are updated at the end of the period based on a physical count.
How does the perpetual inventory system work?
Inventory records are updated continuously after every purchase and sale.
How are inventory purchases recorded under the perpetual system?
Purchases and adjustments (freight, returns, discounts) are recorded in the Inventory account.
How does GST/HST affect inventory costs?
GST/HST is refunded, but PST is included in inventory cost.
Who pays for freight under FOB Destination?
The seller pays; freight is recorded as an operating expense.
Who pays for freight under FOB Shipping Point?
The buyer pays; freight is included in the Inventory account.
How do purchase returns and allowances affect inventory costs?
They reduce the overall cost of inventory.
What is the journal entry for returning inventory under the perpetual system?
Dr. Accounts Payable, Cr. Inventory.
What is a purchase discount?
A discount offered to encourage early payment of an outstanding balance.
What does ‘2/10, n/30’ mean?
A 2% discount is available if payment is made within 10 days; otherwise, the full amount is due in 30 days.
How many journal entries are required to record a sale?
Two: one for the sale revenue and one for the inventory reduction.
What is the journal entry to record a sale?
Dr. Accounts Receivable, Cr. Sales Revenue; Dr. Cost of Goods Sold, Cr. Inventory.
How do sales returns affect revenue?
They reduce revenue and accounts receivable, and if the inventory is returned, it is added back to inventory.
What is the journal entry to record a sales return?
Dr. Sales Returns, Cr. Accounts Receivable; Dr. Inventory, Cr. Cost of Goods Sold (if goods are resellable).
What are the two types of income statements?
Single-step and multiple-step income statements.
What is the difference between single-step and multiple-step income statements?
Single-step groups all revenues and expenses together, while multiple-step separates gross profit, operating income, and net income.
What is the formula for gross profit margin?
Gross Profit Margin = Gross Profit / Sales.
What does gross profit margin measure?
The percentage of sales revenue remaining after covering the cost of inventory sold.
What is the formula for profit margin?
Profit Margin = Net Income / Sales.
What does profit margin measure?
The percentage of each dollar of sales that results in profit.
