Chapter 5: Merchandising Operations and Multi-step Income Statement Flashcards
Comprehensive income
An income measure that 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.
Contra revenue account
An account that is offset against a revenue account on the income statement.
Cost of goods sold (GOGS)
The total cost of merchandise sold during the period.
1) Beginning Inventory
2) Add purchases (add freight in, subtract discounts, and returns/allowances)
3) Available to sell
4) Ending Inventory
5) COGS
Gross profit rate
Gross profit expressed as a percentage by dividing the amount of gross profit by net sales.
Gross profit/Net sales
Gross profit
Gross Profit = Sales - COGS
Net sales
Sales - sales returns and allowances and sales discounts
Periodic inventory system
An inventory system in which a company does not maintain detailed records of goods on hand throughout the period and determines the cost of goods sold only at the end of an accounting period.
- COGS determined at end of accounting period
- Does NOT follow inventory
- Purchases of merchandise are recorded in the purchases account rather than the inventory account
Perpetual inventory system
A detailed inventory system in which a company maintains the cost of each inventory item, and the records continuously show the inventory that should be on hand.
- Follows and records inventory in detail
- Purchases of merchandise for sale are recorded in Inventory
- COGS recorded each time a sale occurs
Profit margin
Measures the percentage of each dollar of sales that results in net income, computed by dividing net income by net sales.
Net income/net sales
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.
Purchase invoice
A document that provides support for each purchase.
Purchase return
A return of goods from the buyer to the seller for cash or credit.
Quality of earnings ratio
A measure used to indicate the extent to which a company’s earnings provide a full and transparent depiction of its performance; computed as net cash provided by operating activities divided by net income
= Net cash/net income
<1 = indicates aggressive techniques >1= indicates conservative techniques
Sales discount
A reduction given by a seller for prompt payment of a credit sale.
Sales invoice
A document that provides support for each sale.
Sales returns and allowances
Transactions in which the seller either accepts 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.
- A purchaser, dissatisfied with merchandise received, may return the goods to the seller for credit.
Sales revenue
Primary source of revenue for a merchandising company.
Merchandise company
Sells products they didn’t create
- Income statement includes: Sales revenue, cost of goods sold, and gross profit
- Ex: Wal-Mart
Business documents
Cash register tapes
Sales invoice
Canceled check
2/10, n/30
2% reduction for ten days and if not paid in ten days then net amount within 30 days
Merchandise inventory
Merchandise owned by the company and in a form ready for sale to customers in the ordinary course of business
Manufacturing company
Sells products that they create
- Raw Materials
- Work in process
- Finished goods
Service company
Don’t sell products, provide services
3 types of companies:
- Merchandising companies: Those who sell products that have already been produced by someone else
- Manufacturing companies: Those who sell products they create
- Service companies: Those that don’t sell products but provide services
