Chapter 5 Terms Flashcards
cost of goods sold
An expense account that is required when you have a purchase and then resale of goods. You will see this with a merchandising company. This is the total cost of the original purchase made by the company of the goods: “the cost of the actual goods sold”.
This is NOT what others will pay for it later.
gross profit
The difference between sales revenue and cost of goods sold. Also known as gross margin.
These three categories replace the Revenues of a service company.
Income Statement for a merchandising company:
Net Sales
Less: Cost of Goods Sold
Equals: Gross Profit
Less: Expenses
Equals: Net Income
gross
Indicates other things such as other expenses still need to be deducted from the amount before a net is calculated, such as net income.
Gros = big in French, so it is probably related to that.
gross profit percentage
The relationship of gross profit to sales.
E.g.
cost of good = $3000
sale price = $4000
= 1- 3000/4000 = 25%
Or
(4000-3000) / 4000 = 25%
Or
(Sales - cost of goods sold) / sales = gross profit percentage
which is really
1 - (cost of goods sold/sales)
Or
gross profit / sales
Keep in mind that gross profit is not the fraction, it is just the profit, so 1000 in this case. When you say percentage you are indicating that it should be divided by the sale price, so 1000/4000. (opposite to this is that mark-up is always a percentage, but we never say mark-up percent!)
I am not sure if it is net sales or sales that is used here. I feel like it is sales so that the company does not get affected by the discounts it offers, but I don’t know and still need to clarify this.
merchandise inventory
Assets held for resale by the merchandiser. This account is not used by a service company; it is used with a merchandising company.
This is an asset account so it is debited whenever the company acquires inventory. It is credited when that inventory is sold. The amounts in merchandise inventory reflect the cost to acquire it (so it generally matches the cost of good sold amount on journal entries, where COGS is debited as an expense as merchandise inventory is credited when it is sold)
perpetual inventory system
Merchandise inventory account and cost of goods sold accounts are updated immediately when transactions occur.
When merchandise is purchased it is debited to the merchandise inventory account (meanwhile crediting cash used to pay for it, or crediting the liability “accounts payable”).
When inventory is sold to customers, the cost of the inventory sold is removed from the merchandise inventory account (so credit merchandise inventory) and debited to the cost of goods sold account (because cost of goods sold works almost like an expense). This amount usually looks like a smaller amount, because it is not using the sale price, just the actual cost of it.
This allows account balances to be known at any time “real-time”. Chapter 5 deals with the perpetual system.
periodic inventory system
Purchase of merchandise inventory is debited to a temporary account called Purchases. At the end of the accounting period, inventory is counted “physical count” and the merchandise inventory account is updated and cost of goods sold is calculated. The inventory count is really important here because it is the only time we are paying attention to the inventory.
Debit purchases
Credit sales
Then when the physical count is done, state merchandise inventory by using the physical count and adjusting the amount, and update cost of goods sold.
so if we have $1000 in the physical count, but it says $1500 in merchandise inventory, then you would have a difference of $500:
Debit cost of goods sold 500
Credit merchandise inventory 500
So that merchandise inventory account reflects what is actually there
Your cost of goods sold account will accumulate and reflect what you don’t have anymore, but only be current right after a physical count is done, so you will not have timely information and thus it is better to use the perpetual inventory system instead (the one you learned in this class, not this periodic one)
purchased
Means that the supplier is planning to give the merchandise (and merchandizer is planning on getting the merchandise), but does not indicate payment from the company to the supplier.
They would say payment when money changes hands.
So purchased –> liability created –> payment is part of the accounting cycle
purchase returns and allowances adjustment, how do you record this as the merchandiser when ordering from the suplier
To correct for having been charged full amount when the supplies are defective/ruined, we can debit “accounts payable” so that less is payable to the supplier since we received ruined merchandise. The merchandise inventory account would need to be credited now since the merchandise cost really was less, and a credit will subtract from that asset account.
For example, a vehicle came but it was the wrong colour, so the supplier gave a discount of $300, but the first purchase has already been recorded so an adjustment must be made:
The original purchase would have looked like this:
Merchandise Inventory 3000
Accounts payable 3000
The adjustment entry for the $2700 new cost would look like this:
Accounts payable 300
Merchandise Inventory 300
This is the perpetual inventory system. We record changes in the Merchandise Inventory each time a relevant transaction occurs.
purchase discounts, how do you record it as the merchandiser buying from the supplier?
Debit accounts payable (the full amount before the discount)
Credit cash (the amount that you actually have to pay now that the discount is removed)
Credit merchandise inventory (the discount amout to show that your inventory is now worth less since you didn’t actually need to pay as much as you originally listed)
Affect the purchase price of merchandise if payment is made within the time period specified on the supplier’s invoice.
Shown with this kind of format:
“A/B, nC”
A = percent purchase price will be reduced by (sale percent)
B= number of days from the invoice date by which to pay in full and receive the benefit of the sale. “discount period”
C = the amount of days to pay in full
“1/15, n45” states that you will get 1% off the total price if paid in the first 15 days, and you must pay by day 45.
Basically the merchandise inventory really needs to stay updated with the actual price on sale and not what the price was going to be. Accounts payable uses the full undiscounted price.
Try 5.2 lab for more practice.
list price
normal selling price of goods to merchandisers
trade discounts
A discount given to merchandisers that buy a large quantity of goods.
When a trade discount is recorded, the Merchandise inventory will use the net amount (the list price less trade discount) not the list price. Essentially we know the discount on purchase so we apply this immediately.
This seems opposite to the purchase discounts from the wrong colour car. But it makes sense just because this net amount is already known so we can get it right immediately without having to make another entry later. With the wrong colour car, eventually the net amount will be reflected in the accounting, but it is not reflected in the first entry.
FOB shipping point
ownership transfers at the shipping point; this means purchaser is responsible for transportation costs
FOB = free on board
Delivery cost is part of the selling cost for the seller when they later sell the item. They are not to be expensed. They are recorded with the merchandise inventory at source.
FOB destination
ownership transfers at the destination point, so the seller is responsible for transportation costs
FOB = free on board
Sales returns and allowances, from the point of view of the seller
“Sales Returns and Allowances” is an account that helps us to make corrections for Ruined merchandise as the seller. Basically, when it is our fault that the supplies are ruined, you will follow this process.
To correct for having charged full amount when the supplies are defective/ruined, we can debit “sales returns and allowances” and credit “accounts receivable” so that less is payable to us since we gave them ruined merchandise.
When they do pay us remember that the accounts receivable will be credited the full amount minus the sales and returns allowance, since the above transaction will have already accounted for the sales return or allowance.
Summary of transactions that can occur on Merchandise Inventory
Summary of transactions that can occur on COGS
Adjustment to COGS after physical inventory count reveals less inventory than in the account
When a physical count of inventory is done, we need to reflect the discrepancy by debiting cost of goods sold the difference between the merchandise inventory account and the physical count of inventory. Credit the merchandise inventory this amount as well to reflect that you have less inventory.
classified multiple-step format income statement
used with merchandising companies; the only type we will learn in this course of many types of income statements
Generally used for internal reporting because it contains a lot of detail.
Notice the expenses grouped by function, but also that it shows the individual accounts (showing nature as well).
Generally it seems that expenses are either selling expense function or general and administrative expense function.
Notice that it is usually Revenue, then Expenses on a service company income statement, but that here it is net sales, gross profit from sales, operating expenses, income from operations, other revenues and expenses, income before tax, income tax expense, net income.
