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ACCTG 211 > Chapter 5 - merchandising operations > Flashcards

Chapter 5 - merchandising operations Flashcards

1
Q

What are merchandising operations

A
  • Companies that buy and sell goods for resale (companies that sell merchandise)
  • This excludes service businesses, manufacturers, government, not for profits
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2
Q

What are the characteristics of merchandising

A
  • Hold inventory (for resale)
  • “Operating cycle” is longer
  • Nature of expenses - merchandising will identify the cost of the goods they have sold
    -Have “operating” expenses, but they may be shown differently
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3
Q

Describe an operating cycle in merchandising businesses

A
  • an operating cycle is the time it takes to go from cash going out in a business to cash coming into a business
  • in a merchandising business, there is an initial cash outflow for the purchase of goods
  • it may take some time to sell those goods and receive cash from the customers
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4
Q

Describe the basic format of an income statement

A

Revenue
Less COGS
= Gross profit
Less: Operating expenses
= Net income before tax
Less: Income tax expense
= Net income

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5
Q

Merchandising companies keep track of their inventory using one of which two methods

A
  1. Perpetual
  2. Periodic
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6
Q

What is inventory in merchandising companies

A

This is good purchased or held for resale

–> supply inventory is different and is not a cost of goods that you’re selling

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7
Q

is the choice of inventory control system a record keeping choice or a reporting choice

A

record keeping choice
–> either way you will be reporting

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7
Q

What type of inventory control system costs more

A
  • Perpetual system –> this is worth it if you have a lot of inventory, and will let you know if something has gone missing immediately
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7
Q

Describe the perpetual inventory control method

A
  • every time a sale is made, inventory is reduced and COGS is recorded
  • inventory purchases are added to the inventory balance
  • continuous record keeping provides us with an up to date inventory balance
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8
Q

Under the perpetual inventory method what is the journal entry when inventory is purchased

A

Dr Inventory
Cr Cash or A/P

(Inventory is an asset that is increasing so debit that, and we used up cash so credit cash)

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9
Q

Under the perpetual inventory method what is the journal entry when inventory is sold

A

Dr COGS
Cr Inventory

Dr. Cash
Cr Sales

  • COGS is an expense which is natural balance debit, so add that expense to our journal by debiting it
  • Inventory is an asset that is decreasing so credit that to remove the item from inventory
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10
Q

In the perpetual inventory method what happens at the end of the accounting period

A
  • at the end of the accounting period that balance in the inventory asset account should equal what is on hand: count it and see
  • if it doesn’t agree then we adjust the asset account for any shortage that becomes known
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11
Q

Describe the periodic inventory method

A
  • no continuous records of inventories or COGS
    -Use the beginning and ending inventory counts plus purchases to calculate COGS
  • Cheaper than the perpetual system but does not show if there is an inventory shortage or provide information between counts
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12
Q

Under the periodic inventory method what is the journal entry when inventory is purchased

A

Dr Purchases
Cr Cash

–> there is no impact to inventory which is why we don’t debit inventory like we do under perpetual system (Instead it goes to the purchases account on income statement) - any purchases are immediately expensed

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13
Q

Under the periodic inventory method what is the journal entry when inventory is sold

A
  • no entry needed because the purchase was already expensed (we don’t keep track of inventory here in this method) vs. perpetual where there are two entries when inventory is sold
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14
Q

Under the periodic inventory method what occurs at the end of the accounting period

A
  • Adjust the accounts to recognize what is counted by transferring the beginning inventory asset to expense and recording the ending inventory asset as whatever is counted, removing that amount form expense

–>:
Dr Beginning Inventory
Cr Inventory
Dr Inventory
Cr Ending inventory

  • beginning and ending inventory are expense accounts
  • inventory is an asset account
15
Q

Under the periodic system How do you sum to COGS

A

Beginning Inventory
Add: purchases
Less: ending inventory
= COGS

–> there is no account called COGS, instead the accounts sum to equal COGS

16
Q

How do you determine COGS on perpetual vs periodic inventory method

A
  • perpetual: COGS is calculated directly as its removed from inventory asset
  • periodic: COGS is deduced on the income statement adjusted for the difference between what was counted as the beginning and ending inventories (COGS = beginning + purchases - ending inventory)
17
Q

What sales tax is included in the cost of inventory

A

PST

18
Q

Describe Freight costs

A
  • shipping/handling costs
  • Freight out - when you sell something and pay for shipping
  • Freight in - when you buy something and pay for shipping into your operation (This is only used in the periodic method - in perpetual method you just debit inventory and credit cash)
  • goes on income statement as operating expenses - not as COGS
  • FOB shipping point: Buyer pays to get the goods to the destination: buyer owns at shipping point
  • FOB destination: Seller pays to get the goods to the destination: buyer owns at destination
  • these are opposite to purchases
19
Q

How are purchase returns and allowances on journal entries in periodic vs perpetual method

A

Periodic
–> Dr A/P
Cr Purchase returns and allowances

Perpetual
–> Dr. A/P
Cr. Inventory

  • purchase returns and allowances is on income statement
20
Q

What would purchase discount of 2/10 net 30 mean, and what would the journal entries be for purchase discounts

A
  • 2% discount if paid within 10 days otherwise due in 30 days
  • the discount taken reduces the cost of merchandise so:

Periodic
Cr. Purchase Discounts

Perpetual
Cr Inventory

21
Q

How do you calculate the net purchases and cost of goods purchased in periodic method v

A

Purchases - Purchase returns and allowances - purchase discounts = net purchases + Freight in = cost of goods purchased

22
Q

What requirement under IFRS is there regarding returns

A
  • requirement to estimate returns if they are possible
23
Q

is sales tax revenue or liability

A

libaility

24
Q

Sales returns and allowances is normal balance what

A

debit (b/c it is contra account to revenue which is normal balance credit)

25
Q

Purchase returns and allowances is normal balance what

A

normal balance credit b/c it is a contra account to to purchases which is an expense account that is credit

26
Q

Describe sales returns and sales discount

A
  • just like a sale requires 2 entries so does a return
  • sales allowances are debited to sales returns and allowances
  • sales discount is a separate contra account to revenue and is recorded when the customer uses the discount
27
Q

If a company under IFRS is selling merchandise to customers what would the journal entry look like under the perpetual system

A

Dr Cash
Cr Sales
Cr Refund liability

Dr. COGS
Dr. Estimated inventory returns
Cr. Inventory

28
Q

Describe the sales of merchandise with estimated returns

A
  • valid under IFRS
  • Refund liability (deferred revenue) account is used
  • estimated inventory (asset account) is used along with COGS in perpetual system
29
Q

If a company under IFRS is returned merchandise by customers what would the journal entry look like under the perpetual system

A

DR.. Refund liability
cr. Cash

Dr. Inventory
Cr. Estimated Inventory returns

  • if its defective than don’t do the last line because that’s where you are reversing the inventory movement
30
Q

What are the two different types of income statements

A

single step and multi step

31
Q

Describe single step income statements

A
  • information is classified into 2 categories
    1. revenue (operating and non-operating)
    2. Expenses (operating and non-operating)
  • income tax expense is its own category
32
Q

Describe multi step income statement

A
  • breaks down the information and provides more subtotals along the way
  • common items include:
  • net sales
  • cogs
    –> gross profit (net sales - cogs)
  • operating expense
    –> Operating income (Gross profit - operating expense)
  • other incomes/expenses
    –> income before income tax (operating income + other income)
  • income tax expense
    –>net income
33
Q

If you need to calculate gross profit margin do you do single step or multi step income statement

A
  • you do multi step because you need net sales - cost of goods sold

ACCTG 211 (5 decks)

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