Chapter 4: Summary Cheat Sheet

Key Terms and Concepts in Merchandising Activities 1. Merchandise: Goods a company buys to resell. 2. Cost of Goods Sold (COGS): The direct costs incurred by a company to sell merchandise. 3. Gross Profit (Gross Margin): The difference between net sales and the cost of goods sold. Gross Profit=Net Sales−COGS\text{Gross Profit} = \text{Net Sales} - \text{COGS}Gross Profit=Net Sales−COGS 4. Inventory: Merchandise that a company owns but has not yet sold. It is listed as a current asset on the balance sheet. 5. Merchandise Cost Flows: o Perpetual Inventory System: Continuously updates inventory records with every purchase and sale. o Periodic Inventory System: Updates inventory records only at the end of a period. Merchandising Purchases 1. Cash Discount: A reduction in the amount paid by the buyer if payment is made within a specific period. o Example: “2/10, n/60” means the buyer can take a 2% discount if payment is made within 10 days; otherwise, full payment is due in 60 days. 2. Gross Method: Records purchases at the full (gross) invoice amount. 3. Transportation Costs and Ownership Transfer: o FOB Shipping Point: The buyer takes ownership once the goods are shipped. o FOB Destination: The seller retains ownership until the goods reach the buyer. Merchandising Sales 1. Sales Discounts: A contra-revenue account that reduces total sales when customers take advantage of early payment discounts. 2. Sales Returns and Allowances: Refunds or price reductions for unsatisfactory goods. 3. Sales Allowance: A price reduction offered to a customer who is dissatisfied with the goods, but keeps them. Merchandiser Reporting 1. Inventory Shrinkage: A loss of inventory due to theft, damage, or errors, requiring an adjusting entry at the end of the period. o Adjusting Entry: Debit COGS and Credit Merchandise Inventory. 2. Closing Entries: o Merchandisers close additional temporary accounts related to merchandise, such as Sales, Sales Discounts, Sales Returns and Allowances, and Cost of Goods Sold. Income Statement Formats 1. Multiple-Step Income Statement: o Divides the statement into three parts: 1. Gross Profit: Net Sales − COGS 2. Income from Operations: Gross Profit − Operating Expenses 3. Net Income: Income from Operations ± Nonoperating Items o Operating Expenses are divided into:  Selling Expenses: Costs of advertising, sales commissions, delivery.  General & Administrative Expenses: Office salaries, rent, supplies. o Nonoperating Activities: Gains, losses, and other revenues unrelated to the main operations. 2. Single-Step Income Statement: o Simpler format where all revenues are grouped together and all expenses are grouped together. o Net Income is calculated by subtracting total expenses from total revenues. Key Financial Ratios 1. Acid-Test Ratio: o Measures liquidity by comparing quick assets (cash, receivables) to current liabilities. Acid-Test Ratio=Quick Assets Current Liabilities A ratio of 1.0 or higher is generally considered healthy. 2. Gross Margin Ratio: o Indicates the percentage of sales revenue remaining after covering the cost of goods sold. o Gross Margin Ratio=Gross ProfitNet Sales Multiple Choice Quiz Review: 1. COGS Calculation: o Answer: $357,000 COGS=550,000−193,000=357,000 2. Cash Paid After Purchase: o Answer: $4,160 (4,500−250)×(1−0.02)=4,160(4,500 - 250) 3. Net Sales Calculation: o Answer: $375,300 Net Sales=75,000+320,000−13,700−6,000=375,300 4. Acid-Test Ratio: o Answer: 0.75 37,50050,000=0.75 5. Gross Margin Ratio: o Answer: 32% Gross Margin Ratio=675,000−459,000675,000=32%