Notes Chapter 5 Vocabulary and Concepts Accounting

Chapter 5 Merchandiser = business that sells merchandise, or goods, to customers • Merchandise Inventory = merchandise that a business sells to customers • Wholesaler = type of merchandiser who buys goods from manufacturers and then sells them to retailers • Retailer = type of merchandiser who buys merchandise either from a manufacturer or a wholesaler and then sells those goods to consumers • Operating Cycle: 1. Purchase Inventory from a vendor = individual or business from whom a company purchases goods 2. Sell Inventory 3. Collect cash from customers • Income Statement: (Cost of Merch Sold) - Reports revenues using an account called sales revenue - Reports cost of merchandise inventory that has been sold to customers as Cost of Goods Sold or Cost of Sales (COGS) = cost of merchandise inventory that the business has sold to customers ➡ Gross Profit = excess of net sales revenue over cost of goods sold ‣ Gross Profit = Net Sales Revenue - Cost of Goods Sold ‣ Represents markup on merchandise inventory ➡ Operating Expenses = expenses, other than Cost of Goods Sold that are incurred in the entity’s major ongoing operations • Balance Sheet: (Resell Inventory) - Includes merchandise inventory in current asset section —> value of inventory business has on hand to sell ➡ Usually listed below Accounts Receivable, but before prepaid assets ➡ Assets are listed in order of liquidity • Inventory Accounting Systems: determines value of merchandise inventory on hand and value of merchandise inventory sold - Periodic Inventory System = requires businesses to obtain a physical count of inventory to determine quantities on hand ➡ Used for relatively inexpensive goods (small local stores) ➡ High volume/Low $ - Perpetual Inventory System = keeps a running computerized record of merchandise inventory ➡ Achieves better control over inventory ➡ Inventory register/Maintain a quantity on a daily basis ➡ Low volume/High $ ➡ Records: ‣ Units purchased and cost amounts ‣ Units sold and sales and cost amounts ‣ The quantity of merchandise inventory on hand and its cost ➡ Merchandise inventory and purchasing systems are integrated with records for Accounts Receivable and Sales Revenue ➡ Invoice = seller’s request for payment from the purchaser, aka bill ➡ HOW SALES OF MERCH INVENTORY ARE RECORED: (SELLING PERSPECTIVE) ‣ Cash and Credit Card Sales are recorded as cash sales and the fees associated ➡ Sales Revenue = amount that a merchandiser earns from selling its inventory ‣ Entries in Perpetual Inventory System: ๏ Sales Revenue and Cash (or Accounts Receivable) ๏ Cost of Goods Sold (debit the expense) and reduces Merch Inventory (credit asset) ‣ Sales on Account ๏ Accounts Receivable (asset) increases, sales rev. (equity) increases ๏ Merch Inventory (asset) decreases, cost of goods sold (equity) increases ➡ Sales Discount = reduction in the amount of revenue earned on sales for early payment ‣ Decreases the net amount of revenue earned on sales ๏ Sales are recorded at net amount or the amount of the sale less any sales discounts ➡ Sales Returns and Allowances = customer’s return of merchandise or an allowance granted to the customer ‣ Estimating Sales Returns: ๏ Estimate amount of sales return related to the sales for that period ๏ Make two adjusting entries • 1. Debit to Sales Revenue —> reduces sales for the year by the expected amount of returns • Refunds Payable account is a liability account • 2. Debit an asset account, Estimated Returns Inventory t • Credit to Cost of Goods Sold decreases the expense • Purchase Discounts = discount that businesses offer to purchasers as an incentive for early payment - Credited to Merchandise Inventory because discount for early payment decreases actual cost paid for Merch Inventory • Credit Terms = payment of purchase or sale as stated on the invoice - Ex. 3/15, NET 30 days means that Smart Touch Learning can deduct 3% from total bill if company pays 15 days of invoice date. Otherwise, full amount (NET) is due in 30 days • Purchase Return = situation in which sellers allow purchasers to return merchandise that is defective, damaged, or otherwise unsuitable • • Purchase Allowances = amount granted to the purchaser as an incentive to keep goods that are not “as ordered” Both decrease buyer’s cost of merchandise inventory • Transportation Costs: - FOB Shipping Point = situation in which the buyer takes ownership (title) to the goods after the goods leave the seller’s place of business (shipping point) and the buyer typically pays the freight ➡ Buyer will pay transportation cost until arrives at destination ➡ Buyer owns the good at shipping point - FOB Destination = situation in which the buyer takes ownership (title) to the goods at the the delivery destination point and the seller typically pays the freight ➡ Seller will pay transportation cost until arrives at your destination ➡ Seller owns the good until they arrive at the destination - Freight In = transportation cost to ship goods into the purchaser’s warehouse; therefore, it is freight on purchased goods - Freight Out = transportation cost to ship goods out of the seller’s warehouse; therefore, it is freight on goods sold to a customer • Costs of Inventory Purchased: - Net Cost of Merchandise Inventory Purchased Includes: ➡ Purchase cost of inventory ➡ Less purchase returns and allowances ➡ Less purchase discounts ➡ Plus freight in ➡ ALLOWS BUSINESS TO DETERMINE ACTUAL COST OF MERCHANDISE PURCHASED AND IS CALCULATED AS … Adjusting Entries for Merchandiser: • Based on Physical Count - Inventory Shrinkage = loss of inventory that occurs because of theft, damage, and errors - Most common time to count inventory is at the end of the fiscal year ➡ Business then adjusts the Merch Inventory account based on physical count Closing Accounts of a Merchandiser: • Steps: 1. Make the revenue accounts equal zero via the Income Summary Account 2. Make expense accounts equal zero via the Income Summary Account 3. Make the Income Summary account equal zero via the Owner, Capital account. - This closing entry transfers net income (or net loss) to Owner, Capital 4. Make the Owner, Withdrawals account equal zero via the Owner, Capital account Preparation of Merchandiser’s Financial Statements • Income Statement - Single - Step Income Statement = income statement format that groups all revenues together and then lists and deducts all expenses together without calculating any subtotals ➡ Clearly distinguishes revenues from expenses and works well for service entities because they have no gross profit to report ➡ Begins by calculating gross profit = markup on the merchandise inventory and is calculated as net sales revenue mins cost of goods sold ‣ Net Sales Revenue = Sales Revenue - Discounts - Estimated Returns and Allowances - Multi - Step Income Statement = income statement format that contains subtotals to highlight significant relationships. In addition to net income, it reports gross profit and operating income - Expenses ➡ Selling Expenses = expenses related to marketing and selling the company’s goods and services ‣ Includes: ๏ Sales Salaries ๏ Commissions ๏ Advertising ๏ Depreciation on store buildings ๏ Store Rent ๏ Utilities on store buildings ๏ Property Taxes ๏ Delivery Expense ➡ Administrative Expenses = expenses incurred that are not related to marketing the company’s goods and services ‣ Includes: ๏ Office Expenses (Salaries) ๏ Depreciation on Office Buildings and equipment ๏ Rent ๏ Utilities ๏ Property Taxes ➡ Operating Income = measures the results of the entity’s major ongoing activities ‣ Gross Profit - Operating Expenses = Operating Income ➡ Other Income and Expenses = revenues or expenses that are outside the normal, day - to day operations of a business, such as a gain or loss on the sale of plant assets or interest expense ‣ Includes: ๏ Interest Revenue ๏ Sales Discounts Forfeited ๏ Interest Expense ๏ Gains and Losses on sale of plant assets Gross Profit Percentage = measures the profitability of each sales dollar above the cost of goods sold • Gross Profits / Net Sales Revenue = Gross Profit Percentage • Reflects a business’s ability to earn a profit on its merchandise inventory Multiple Performance Obligations in a Perpetual Inventory System • Identify performance obligations associated with each contract - Performance Obligation: contractual promise with a customer to transfer a g/s • Company is required to allocate the transaction price to each performance obligation separately • Only recognize revenue when, or as, it satisfies each performance obligation - Ex. Smart Touch Learning sells one tablet ($350) along with a two - year service contract to a customer for $620 ➡ $620 is broken down to $500 for the tablet (Sales Revenue) and $120 for the two-year service contract (Unearned Revenue) Merchandise Inventory Transactions in a Periodic Inventory • Purchases, purchase discounts, purchase returns and allowances, and freight in costs are recorded in separate accounts during the year • Merch Inventory account is updated in closing process Recording Purchase Returns & Allowances • Record returns to Accounts Payable and Purchase Returns and Allowances • Net Purchases = purchases - purchase returns and allowances - purchase discounts Recording Transportation Costs • Freight in is debits to Freight In account and Cash account Sale of Merchandise Inventory • Sale of Inventory involves recording only the Sales Revenue portion - Accounts: Accounts Receivable and Sales Revenue ➡ Sales Revenue = (Total Sale Purchase - (Total Sale Purchase x Credit Term)) Preparing Financial Statements • Periodic Inventory System requires an additional calculation - the cost of goods sold Adjusting and Closing Entries • Temporary Accounts that are Closed: Merchandise Inventory (beginning), Purchases, Purchase Returns and Allowances, Purchase Discounts, Freight In • Steps for Periodic Inventory System 1. Sales Revenue and Sales Discounts Forfeited are still closed with a debit via the Income Summary account - All other temporary accounts with credit balances are closed (Purchase Returns & Allowances & Purchase Discounts) - Ending Merchandise Inventory and Estimated Returns Inventory are recorded as debits 2. Expense accounts and other temporary accounts with debit balances are still closed via the Income Summary account - Ending inventory is recorded with a debit entry and the beginning inventory is removed with a credit entry during the closing process 3. and 4. Closing Income Summary and Owner, Withdrawals accounts, are the same under both methods