Chapter 5: Accouting for Merchandising Operations Flashcards
What are the two types of inventory systems and describe each one briefly.
Perpetual Inventory - This system continuously updates the inventory as changes take place (sales, purchases, returns, etc.).
Periodic Inventory - This system updates inventory periodically. A some point, the company conducts a physical count of its inventory to determine how much is available and will update the inventory amount in it’s accounting books.
Describe the flow of inventory costs through the Perpetual Inventory Systems.
Purchases of inventory get debited to the Inventory Account.
Once a sale has been made, the COST of the purchase is debited to Cost of Goods Sold account and credited to the Inventory account which reduces the amount in the inventory account.
Describe the flow of inventory costs through the Perpetual Inventory Systems.
Purchases of inventory get debited to the Purchases account.
Once a sale has been made, the inventory account is not updated immediately.
At the end of the accounting period, the company does a physical inventory count and then calculates cost of goods sold.
What accounts are debited for Freight Costs on Purchases for the Perpetual and Periodic inventory systems.
Perpetual - Debit Merchandise Inventory
Periodic - Debit Freight In
What accounts are debited for Freight Costs on Sales for the Perpetual and Periodic inventory systems.
Periodic & Perpetual - Debit Freight Out
How do you calculate Cost of Goods sold under the Periodic inventory system?
HINT: Begin with Cost of Goods Purchased calculation, then Costs of Goods available for Sale calculation.
Purchases - Purchases Returns & Allowances - Purchase Discounts = Net Purchases + Freight In = Cost of Goods Purchased
Beginning Inventory + Cost of Goods Purchased = Cost of Goods Available for Sale - Ending Inventory = Cost of Goods Sold
How do you determine who pays the freight costs?
This depends on the terms agreed to by the buyer and seller. The point at which ownership is transferred determines who pays the freight costs. This can either be FOB Destination (Ownership transferred once goods have arrived at the destination - seller pays shipping) or FOB Shipping Point (Ownership transferred as soon as goods are shipped - buyer pays shipping)
What are the three types of discounts and briefly describe them?
Quantity Discounts: Volume discounts for purchasing in bulk. This amount is NOT recorded in the accounting books.
Purchase Discounts: Offered to customers to make payments earlier than the agreed terms. These amounts ARE recorded in the accounting books.
Sales Discounts: Same as purchase discounts but are applies to sales.
How do you calculate the Gross Profit Margin and what is that information useful for?
Gross Profit / Net Sales = Gross Profit Margin. Usually written as a percentage. This shows the portion of ever sales dollar that ends up in gross profit.
How do you calculate the Profit Margin and what is that information useful for?
Net Profit / Net Sales = Profit Margin. Usually written as a percentage. This shows the portion of every sales dollar that ends up in profit after accounting for expenses.
