Chapter 5 Flashcards
Merchandising Operations
Sales revenue
The main source of revenue in a merchandising company.
Cost of goods sold
The total cost of inventory sold during the period.
In a perpetual inventory system, it is calculated and recorded for each sale.
In a periodic inventory system, it is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale.
Gross profit (aka gross margin)
Gross Profit = Sales Revenue - Cost of Goods Sold
Operating expenses
Expenses incurred in the process of earning sales revenue. They are deducted from gross profit to arrive at income from operations (income before income tax).
Perpetual inventory system
An inventory system in which the quantity and cost of each inventory item is maintained. The records continuously show the inventory that should be on hand and the cost of the items sold.
Periodic inventory system
An inventory system in which detailed records are not maintained and the ending inventory and cost of goods sold are determined only at the end of the account period, after a physical inventory count has been completed.
Cost of goods available for sale
Beginning Inventory + Cost of Goods Purchased.
Cost of goods purchased
Net Purchases + Freight Costs.
Purchase returns and allowances
A return of goods for cash or credit, or a deduction granted by the seller on the selling price of unsatisfactory merchandise.
Purchase discount
A price reduction, based on the invoice price less any returns and allowances, to encourage customers to make an early payment of a credit purchase.
FOB Shipping Point
BUYER is responsible for the freight costs from the shipping point to the buyer’s destination, and for any lost/damage along the way.
Goods become part of the buyer’s inventory at the shipping point.
FOB Destination
SELLER is responsible for the freight costs from the shipping point to the buyer’s destination, and for any lost/damage along the way.
Goods stay in the seller’s inventory until delivery.
Sale returns and allowances
A return of goods or reduction in price due to unsatisfactory merchandise.
Contra revenue account
An account that is offset against (reduces) a revenue account on the income statement.
Examples: Sale returns and allowances account; Sales discounts account.
Quantity discount
A price reduction that reduces the invoice price and is given to the buyer for volume purchases. Quantity discounts are NOT separately recorded.
Sales discount
A price reduction that is based on the invoice price, less any returns and allowances, and is give by a seller for early payment of a credit sale.
Gross sales
Total sales, before deducting and sale returns, allowances and discounts.
Net Sales
Net Sales = Gross Sales - Sales Returns and Allowances - Sale Discounts
Single-step income statement
Income statement that shows only one step (revenues - expenses) in determining income before income tax, after which income tax expense is deducted to determine net income (loss).
Nature
A method of organizing expenses on the income statement by way of their natural classifications (ex. salaries, transportation, depreciation, advertising).
Function
A method of organizing expenses on the income statement by way of the activity (business function) for which they were incurred (ex. cost of goods sold, administrative, and selling).
Multiple-step income statement
An income statement that shows several steps to determine net income (loss), by separately reporting net sales, gross profit, income from operations, income before income tax, and net income.
Income from operations
The results of a company’s normal operating activities, calculated as Gross Profit - Operating Expenses.
Gross profit margin
What does it indicate?
Gross profit expressed as a percentage of sales.
GPM = Gross Profit / Net Sales
GPM indicates how much higher the selling price is than the cost of goods sold.
Profit margin
What does it indicate?
Net income expressed as a percentage of net sales.
PM = Net Income / Net Sales
PM indicates how well the selling price covers all expenses.
What are the five main steps of the multi-step income statement?
- Net sales: Gross sales less sales returns and allowances and sales discounts.
- Gross profit: Net sales less cost of goods sold.
- Income from operations: Gross profit less operating expenses.
- Income before income tax: Income from operations plus non-operating revenues and less
non-operating expenses. - Net income: Income before income tax less income tax expense.
