Chapter 5 Flashcards
Retailers
Merchandising companies that purchase and sell dierectly to consumers
Wholesalers
Merchandising companies that sell to retaliers
Cost of goods sold
Total cost of merchandise sold during the period
Gross profit
Sales revenue - Costs of goods sold
Net income
Gross profit - operating expenses
Perpetual inventory system
An inventory system in which a company maintains the cost of each inventory item and records continuously show the inventory that should be on hand
Periodic inventory system
An invnentory system when a company does not maintain detalied records of goods on hand and determines the cost of goods sold only at the end of an accounting period
Helpful hint: perpetual inv.
Under perpetual inventory systems, companies perform physical inventories
Done as a control to verify inventory levels, in order to detect theft or “shrinkage”
Morrow Snowboards, Inc.
Investors were scared because of accounting problems
To reduce concerns, they implemented a perceptual inventory system
Purchase invoice
Indicates the total purchase price and other relevant information
each purchase should have one
purchases for merchandise (under perpetual)
Recorded in the Inventory Account
FOB
free on board
FOB shipping point
The seller places the goods free on board the carrier
Buyer pays freight costs
FOB destination
Seller places good free on board to the buyer’s place of business
Seller plays the freight costs
When buyer pays freight charges, _____________
“FOB shipping point”
Inventory is increased
When seller incurrs the freight costs, _______________
They are an operating expense the seller
Increase in the “Freight-out” or “Delivery expense” accounts
*sellers often increase invoice price to cover
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 so that the buyer will keep the merchandise
purchase discount
A cash discount claimed by a buyer for prompt payment of a balance due
credit terms
specify the amount of the cash discount and time period during which it is offered
discount period
between the invoic date and the payment
meaning of net in “net 30”
The remaining amount due after subtracting any returns and allowances and partial payments
Sales invoice
A documentthat provides support for each sale
Cash register tapes
Provide evidence of cash sales
Business document
Provides written evidence of the sale
Ethics note: General Electric
Try to improve quality of financial reporting
Provides more detail on revenue and operating profits
If the seller is granted an allowance, the company journals it as ________________________________
Debit sales returns and Allowances
Credit Accounts Receievable
*FOR THE AMOUNT OF ALLOWANCE*
Sales Returns and Allowances Account
Contra revenue account to Sales Revenue
Normal balance = debit
Sales discount account
Given by seller for a prompt payment of balance due
Contra revenue acocunt to sales revenue
Normal balance = debit
Single step income statement
Includes revenues and expenses
*company does not realize profit or income until total revenues exceed total expenses
*simple and easy to read
Multi-step income statement components
Gross profit
Income from operations
Net income
Gross profit
Net sales - cost of goods sold
Income from operations
Gross profit - operating expenses
International note: IASB and FASB
Working to evaluate format of financial statements
Income statement format that better reflects how businesses are run
Gross profit represents ________________
Merchandising profit
Comparrisons with past gross profit indicate the dffictiveness of a company’s purchasing and pricing policies
Nonoperating activities
Consists of various revenues and expenses and gains and losses that are unreleated to the company’s main line of operations
under “Income from operations”
Ethics note: ConAgra
recorded a nonrecurring gain for $186 million from the sale of Pilgrim’s Pride stock to help meet an earnings projection for the quarter
Periodic system equation
Beginning inventory
+
Cost of Goods purchased
= Cost of Goods available for sale
- ending inventory
= Cost of goods sold
Gross profit rate =
Gross profit
Net sales
Profit Margin Ratio
Net income
Net Sales
What does the profit margin ratio measure?
Measures the extent by which selling price covers all expenses
3.4% profit margin
Company generates 3.3 cents of profit on each dollar of sales
Quality of earnings ratio =
Net Cash provided by operating activities
Net income
A number significantly greater than one for quality of earnings ratio
suggests a company is using conservative accounting, delay the recognition of income
A number significantly less than one quality of earnigs ratio
Comapny is using agressive accounting in order to accelerate income recognition
Purchases of merchandise in a periodic system
Under Purchases account rather than inventory account
Freight-in
Temporary account whose normal balance is debit
*a part of cost of goods purchaed*
Purchase Returns and Allowances
A temporary account
Normal balance = credit
Purchase Discounts
Temporary account
Normal balance = credit
