Chapter 5 Flashcards
Retailers
Merchandising companies that sell directly to consumers
Wholesalers
Merchandising companies that sell directly
Cost of goods sold
The total cost of merchandise sold during the period
Gross profit =
Sales revenue -cost of goods sold
Net income/loss =
Gross profit- operating expenses
Cost of goods available for sale =
Beginning inventory + cost of goods purchased
Perpetual inventory system
Companies maintain detailed records of the cost of each inventory purchase and sale
Cost of good sold recorded each time a sale occurs
Periodic inventory system
Companies do not keep detailed inventory records of the goods on hand throughout the period
Cost of goods sold determined at the end of the period
Determing the cost of goods sold in a periodic system
Determine the cost of goods on hand st the beginning of the accounting period
Add it to the cost of goods purchased
Subtract the cost of goods on hand determined by the physical inventory count at the end of the period
Perpetual system records purchases of merchandise for sale in the ___________account
Inventory
FOB Shipping point
Buyer pays the freight costs (debit inventory)
FOB Destination
Seller pays freight costs (debit freight out or delivery expense)
Purchase return
A return of goods from the buyer to the seller for cash or credit
Purchase allowance
A deduction made to the selling price of merchandise granted by the seller do that the buyer will keep the merchandise
Purchase discount
A cash discount claimed by the buyer for prompt payment of balance due
Sales returns and allowance
Transactions in which the seller either accepted goods back from the purchaser (a return) or grants a reduction in the purchase price (an allowance) so that the buyer will keep the goods
Contra revenue account
An account that is off set against a revenue account on the income statement
gross profit =
Net sales - cost of goods sold
Income from operations =
Gross profit - operating expenses
Net sales =
Sales revenue -sales returns/allowances - sales discounts
Comprehensive income
An income measure includes gains and losses that are excluded from the determination of net income
Comprehensive income statement
A statement that presents items that are not included in the determination of net income referred to as other comprehensive income
Periodic : determining cost of goods sold
Beginning inventory + cost of goods purchased = costs of goods available for sale - ending inventory = cost of goods sold
Gross profit as a percent
Gross profit / net sales
Profit margin
Measures the percent of each dollar of sales that results in the net income -measures the extent by which selling price covers all expenses
Merchandising company
Only needs one inventory classification merchandising inventory
Manufacturing company 3 qtypes of inventory :
Finished goods: items that are ready for sale
Work in process: items that have begun the production lrocess but have yet to be completed
Raw materials: basic goods that will be used in production but not yet placed into production
Just in time inventory
Manufacture or purchase goods only when necessary
Perpetual end of period inventory count:
Check accuracy of records
Determine amount of inventory lost due to wasted raw materials shoplifting or employee theft
accrual basis accounting
1) transactions recorded in periods in which event occurs
2) revenues are recognized when services are performed, even if cash was not received
3) expenses are recognized when incurred, even if cash was not paid
cash basis accounting
1) revenues are recognized only when cash is received
2) expenses are recognized only when cash is paid
3) not in accordance with GAAP
adjusting entries
1) ensure that the revenue recognition and expense recognition principles are followed
2) required every time a co prepares financial statements
3) includes one income statement accoutn and one balance sheet account
deferrals
1) prepaid expenses-paid in cash before they are used or consumed
2) unearned revenues-cash received before services are performed
accruals
1) accrued revenues- revenues for services performed, but not yet received in cash or recorded
2) accrued expenses- expenses incurred but not yet paid in cash or recorded
examples of prepaid expenses
insurance, supplies, ads, rent, depreciation
before adjusting prepaid expenses
assets overstated, expenses understated
adjusting entry for prepaid expenses
dr expenses
cr. assets
examples of unearned revenues
rent, subscriptions, customer deposits for future service
before adjusting unearned revenues
liabilities overstated, revenues understated
adjusting entry for unearned revenues
dr. liabilites
cr. revenues
examples of accrued revenues
interest, rent, services performed but uncollected
before adjusting accrued revenues
assets understated, revenues understated
adjusting entry for accrued revenues
dr. assets
cr. revenues
examples of accrued expenses
interest, rent, salaries
before adjusting accrued expenses
expenses understated, liabilities understated
adjusting entry for accrued expenses
dr. expenses
cr. liabilities
first closing entry
dr. revenues
cr. income summary
second closing entry
dr. income summary
cr. expenses
third closing entry
dr. income summary
cr. retained earnings
fourth closing entry
dr. retained earnings
cr. dividends
