Chp 5 Flashcards
2 general categories of expenses for a merchandising company
- COGS
2. operating expenses
Def of COGS
Total cost of merchandise sold during the period. (Directly tied to the revenue.)
The measurement process for a merchandising company
Sales Revenue
- COGS
= Gross Profit
Gross Profit
- Operating Expenses
= Net Income/Loss
(COGS and gross profit are unique to merchandising companies)
2 alternate systems to account for inventory
perpetual inventory system and periodic inventory systems
Def of perpetual inventory system
COGS are determined each time a sale occurs
Def of periodic inventory systems
COGS only determined at end of the accounting period.
- Co does not keep detailed record of goods on hand
- Uses physical inventory to determine cost of goods on hand
3 steps in the periodic inventory process
- Determine the cost of goods on hand at beginning of the period
- Add the cost of goods purchased
- Subtract the cost of goods on hand at the end of the period.
What the company uses to support each purchase of inventory on account
purchase invoice (usually they just use the sales invoice from the seller for this)
The two K options for freight
FOB shipping point
FOB destination
How does buyer record cost of FOB shipping point?
Debits inventory (To record payment of freight on goods purchased)
What do COGS include?
All costs to acquire the inventory
2 ways the buyer may account for unsatisfactory goods goods (what options the seller normally provides)
- purchase return
2. purchase allowance (goods not returned, but seller deducts from the price)
How to account for purchase allowance under perpetual inventory system
Reduce Payable and Inventory for the allowance amount.
What is a purchase discount?
When a buyer on account claims cash discount for prompt payment.
What is a the Sales Returns and Allowances account?
A contra revenue account for accounting for sales returns and allowances provided.
What is the Sales Discount account?
A contra revenue account for sales discounts provided.
What is sales revenue (net sales)?
Sales less returns, allowances, and discounts. (Shown on income statement.)
How to calculate gross profit rate (and what does it tell you?)
gross profit/net sales (= what % of sales are net sales vs. COGS)
Def of operating expenses
Expenses incurred in the process of earning revenue.
Def of nonoperating activities
revenues and expenses, and gains/losses, unrelated to the main line of operations (Other Revenues and Gains or Other Expenses and Losses on the IS). Includes interest expense on notes and loans payable.
Besides not keeping a COGS account, how does accounting differ under periodic from perpetual?
Purchases of merchandise, purchase returns and allowances, and purchase discounts are all recorded in separate accounts.
Is the Purchases account temporary or permanent?
temporary
Normal balance for the Purchases account
debit (credit Cash or Accounts Payable)
What is the Freight-In account in a periodic inventory system?
A separate account, but still becomes part of COGS (FOB shipping point)
