Chapter 6 Flashcards
Cost of goods sold
Total cost of merchandise sold during the period
Perpetual inventory system
Maintains detailed records of the cost of each inventory purchase and sale, records continuously show inventory that should be on hand for every item, and company determines cost of goods sold each time a sale occurs
FOB shipping point
Buyer pays the freight costs
FOB destination
Seller pays the freight costs
Freight costs incurred by the seller are an…
Operating expense
Freight costs incurred by the buyer are…
Part of the costs of goods (cost of purchasing inventory)
Credit terms
May permit buyer to claim a cash discount for prompt payment
2/10, n/30
2% discount if paid within 10 days, otherwise full amount due in 30 days
1/10, EOM
1% discount if paid in first 10 days of next month
n/10 EOM
Net amount due within the first 10 days of the next month
If something is paid within the discount range, why is there a reduction in inventory
Because inventory is recorded at cost, and a discount is a decrease in the cost
Sales revenue is recorded when
The performance obligation is satisfied
For each sale, what accounts change and in what way
Increase AR/cash
Increase sales revenue
Increase cost of goods sold (expense)
Decrease inventory
What does a sale discount effect on the income statement
It is a subtraction from the revenue, to determine net sales
3 important lines of a multistep income statement
- Gross profit
- Income from operations
- Net income
Nonoperating activities
Other revenues and gains and other expenses and losses
Other revenues and gains
Interest revenue, dividend revenue, rent revenue, gain from sale of PPE
Other expenses and losses
Interest expense, casualty losses, loss from sale of PPE, loss from strikes by employees and suppliers
Gross profit rate
Gross profit/net sales x100
Gross profit rate helps decide what
If the prices of their goods are in line with changes in the cost of inventory
Profit margin
Net income/net sales x100
Gros profit rate measures…
The margin by which selling price exceeds cost of goods sold
Profit margin ratio measures…
The extent by which selling price covers all expenses
