Chapter 6 Flashcards
A series of activities that a company undertakes to generate revenues and, ultimately, cash
Operating Cycle
Merchandisers report Inventory as a __________, but service companies do not. Service companies often report Supplies, but they differ from inventory because supplies are goods acquired for internal use. Inventory consists of goods acquired for resale to customers.
(1) Current Asset
Service companies earn revenue from ________ whereas merchandisers earn revenue from ______.
(1) Services
(2) Sales
Merchandisers report an expense called _____________, which represents the total cost of all goods sold to customers during the period. Service companies do not incur this expense because they do not sell goods.
(1) Cost of Goods Sold
Three accounts important to a merchandiser:
(1) Inventory
(2) Sales Revenue
(3) Cost of Goods Sold
Reports the merchandiser’s total cost of acquiring goods that it has not yet sold.
Inventory
The total selling price of all goods that the merchandiser did sell to customers during the period.
Sales Revenue
Cost of all goods that the merchandiser did sell to customers during the period.
Costs of Goods Sold
Sales Revenue - Cost of Goods Sold =
Gross Profit
Cost of Goods Available =
Beginning Inventory + Purchases
Goods available for sale sold during the period reported on income statement.
Cost of Goods Sold
Periodic Inventory System Equation:
Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold
Perpetual Inventory System
Beginning Inventory + Purchase - Cost of Goods Sold = Ending Inventory
Updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period.
Periodic Inventory System
True or False: To determine how much inventory is on hand and how much inventory has been sold in a periodic inventory system, they require that inventory be physically counted by the employees at the end of the period.
True
The inventory records are updated every time inventory is bought, sold, or returned. Usually combined with bar codes and optical scanners.
Perpetual Inventory System
Can’t estimate shirnkage
Periodic Inventory System
Can estimate shrinkage
Perpetual Inventory System
Politically correct term for loss of inventory from theft, fraud, and error.
Shrinkage
Record all inventory related transactions in the __________.
Inventory Account
Journal entry when business purchases on account:
Inventory (Debit)
Accounts Payable (Credit)Journal entry when business purchases with cash:
Inventory (Debit)
Cash (Credit)
Journal entry when business receives a return:
Accounts Payable (Debit)
Inventory (Credit)Purchase Discounts: 2/30, n/60
2 - Discount percentage offered
30 - Number of days in discount period
n - Net Purchase
60 - Maximum Credit Period
Merchandisers record revenue when they ____________ by transferring control of goods to customer, either for cash or on credit.
Fulfill their performance obligations
The sale is recorded when the goods leave the seller’s shipping department
FOB Shipping Point
The sale is recorded when the goods reach their destination (the customer).
FOB Destination
Journal entries for recording inventory sales:
(1) Cash (Debit)
Sales Revenue (Credit)
(2) Cost of Goods Sold (Debit)
Inventory (Credit)
When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can:
(1) Return for full refund
(2) Keep them and ask for a reduction in the selling price, called an allowance
5 Steps in Revenue Recognition Principle:
(1) Identify the contract
(2) Identify the seller’s performance obligations
(3) Determine the transaction price
(4) Allocate the transaction price to the performance obligations.
(5) Recognize revenue when each performance obligation is satisfied.
Journal Entry for Sales of Bundled Items:
*include deferred revenue
Separates the revenues and expenses that relate to core operations from all the other (peripheral) items that affect net income.
Multistep Income Statement
Net Sales - Cost of Goods Sold =
Gross Profit
True or False: Gross Profit is a subtotal not an account.
True
Gross Profit % =
100x [ (Gross Profit)/ (Net Sales) ]
