MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT Accounting, Four

MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT Accounting, Four www.phwiki.com

MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT Accounting, Four

Ramirez, Jacobo, Host has reference to this Academic Journal, PHwiki organized this Journal MERCHANDISING OPERATIONS AND THE MULTIPLE-STEP INCOME STATEMENT Accounting, Fourth Edition 5 Identify the differences between a service company in addition to a merch in addition to ising company. Explain the recording of purchases under a perpetual inventory system. Explain the recording of sales revenues under a perpetual inventory system. Distinguish between a single-step in addition to a multiple-step income statement. Determine cost of goods sold under a periodic system. Explain the factors affecting profitability. Identify a quality of earnings indicator. Study Objectives

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Merch in addition to ising Operations Recording Purchases of Merch in addition to ise Recording Sales of Merch in addition to ise Income Statement Presentation Evaluating Profitability Merch in addition to ising Operations Operating cycles Flow of costs- perpetual in addition to periodic inventory systems. Freight costs Purchase returns in addition to allowances Purchase discounts Summary of purchasing transactions Sales returns in addition to allowances Sales discounts Sales revenues Gross profit Operating expenses Nonoperating activities Determining cost of goods sold-periodic system Gross profit rate Profit margin ratio Merch in addition to ising Operations SO 1 Identify the differences between service in addition to merch in addition to ising companies. Merch in addition to ising Companies Buy in addition to Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as sales revenue or sales. Merch in addition to ising Operations SO 1 Identify the differences between service in addition to merch in addition to ising companies. Income Measurement Cost of goods sold is the total cost of merch in addition to ise sold during the period. Not used in a Service business. Net Income (Loss) Less Less Equals Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Illustration 5-1 Income measurement process as long as a merch in addition to ising company

The operating cycle of a merch in addition to ising company ordinarily is longer than that of a service company. Illustration 5-2 SO 1 Identify the differences between service in addition to merch in addition to ising companies. Operating Cycles Merch in addition to ising Operations Flow of Costs Companies use either a perpetual inventory system or a periodic inventory system to account as long as inventory. SO 1 Identify the differences between service in addition to merch in addition to ising companies. Merch in addition to ising Operations Illustration 5-3 Perpetual System SO 1 Identify the differences between service in addition to merch in addition to ising companies. Merch in addition to ising Operations Maintain detailed records of the cost of each inventory purchase in addition to sale. Records continuously show inventory that should be on h in addition to . Company determines cost of goods sold each time a sale occurs. Flow of Costs

Periodic System Do not keep detailed records of the goods on h in addition to . Cost of goods sold determined by count at the end of the accounting period. Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Add: Purchases, net 800,000 Goods available as long as sale 900,000 Less: Ending inventory 125,000 Cost of goods sold $ 775,000 SO 1 Merch in addition to ising Operations Flow of Costs Additional Consideration Perpetual System: Traditionally used as long as merch in addition to ise with high unit values. Provides better control over inventories. Requires additional clerical work in addition to additional cost to maintain inventory records. SO 1 Identify the differences between service in addition to merch in addition to ising companies. Merch in addition to ising Operations Flow of Costs

Made using cash or credit (on account). Recording Purchases of Merch in addition to ise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration 5-5 Normally recorded when goods are received. Purchase invoice should support each credit purchase. Illustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry as long as Sauk Stereo as long as the invoice from PW Audio Supply. Inventory 3,800 May 4 Accounts payable 3,800 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merch in addition to ise Illustration 5-5 Illustration 5-6 Shipping terms Ownership of the goods passes to the buyer when the public carrier accepts the goods from the seller. Ownership of the goods remains with the seller until the goods reach the buyer. Recording Purchases of Merch in addition to ise Freight Costs – Terms of Sale Freight costs incurred by the seller are an operating expense.

Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Haul-It Freight Company $150 as long as freight charges, the entry on Sauk Stereo’s books is: Inventory 150 May 6 Cash 150 Recording Purchases of Merch in addition to ise SO 2 Explain the recording of purchases under a perpetual inventory system. Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: Freight-out 150 May 4 Cash 150 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns in addition to Allowances Recording Purchases of Merch in addition to ise Return goods as long as credit if the sale was made on credit, or as long as a cash refund if the purchase was as long as cash. May choose to keep the merch in addition to ise if the seller will grant an allowance (deduction) from the purchase price. Purchase Return Purchase Allowance SO 2 Explain the recording of purchases under a perpetual inventory system. In a perpetual inventory system, a return of defective merch in addition to ise by a purchaser is recorded by crediting: Purchases Purchase Returns Purchase Allowance Inventory Question Recording Purchases of Merch in addition to ise SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Purchases of Merch in addition to ise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. Accounts payable 300 May 8 Inventory 300 Credit terms may permit buyer to claim a cash discount as long as prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase Discounts Recording Purchases of Merch in addition to ise Example: Credit terms may read 2/10, n/30. SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merch in addition to ise 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. 2/10, n/30 1/10 EOM Net amount due within the first 10 days of the next month. n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system. Purchase Discounts – Terms

Accounts payable 3,500 May 14 Cash 3,430 Recording Purchases of Merch in addition to ise Inventory 70 (Discount = $3,500 x 2% = $70) SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns in addition to allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk Stereo makes to record its May 14 payment. Accounts payable 3,500 June 3 Recording Purchases of Merch in addition to ise Cash 3,500 SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: If Sauk Stereo failed to take the discount, in addition to instead made full payment of $3,500 on June 3, the journal entry would be: Should discounts be taken when offered Purchase Discounts Recording Purchases of Merch in addition to ise Example: 2% as long as 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%) SO 2 Explain the recording of purchases under a perpetual inventory system.

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$3,500 8th – Return $300 Balance 4th – Purchase $3,280 70 14th – Discount Recording Purchases of Merch in addition to ise Summary of Purchasing Transactions 150 6th – Freight-in SO 2 Explain the recording of purchases under a perpetual inventory system. Made using cash or credit (on account). Illustration 5-5 Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. Recording Sales of Merch in addition to ise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Journal Entries to Record a Sale Cash or Accounts receivable XXX Sales revenue XXX Recording Sales of Merch in addition to ise SO 3 Explain the recording of sales revenues under a perpetual inventory system. 1 Cost of goods sold XXX Inventory XXX 2 Selling Price Cost

Recording Sales of Merch in addition to ise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Accounts receivable 3,800 May 4 Sales revenue 3,800 Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo on account (Illustration 5-5) as follows. Assume the merch in addition to ise cost PW Audio Supply $2,400. Cost of goods sold 2,400 4 Inventory 2,400 “Flipside” of purchase returns in addition to allowances. Contra-revenue account (debit). Sales not reduced (debited) because: Would obscure importance of sales returns in addition to allowances as a percentage of sales. Could distort comparisons. Sales Returns in addition to Allowances Recording Sales of Merch in addition to ise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

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