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Accounting Ch.5

Service Business? Fees Earned-Operating Expenses=Net income
Merchandising Business? Sale-Cost of Merchandise=Gross Profit Gross Profit-Operating Expenses=Net Income
Gross Profit Formula? Sales-Cost of Merch. Sold=Gross Profit
Net Income Formula? Gross Profit-Operating Expenses=Net Income
The Operating Cycle? Cash->Purchase Activity->Products->Sales Activity->Accts. Receivable->Collection Activity->Cash
Periodic Inventory System? Merchandise Inventory at the end of the period is determined by taking a physical count of inventory on hand.
Perpetual Inventory System? Amounts of inventory purchased, for sale, and sold are continuously updated in the inventory records.
Purchase Discounts? Buyer may receive a discount from the seller for early payment of amount owed.
Purchase Return? Actually returning merchandise that is damaged or does not meet the specifications of the orders. A.K.A=Allowances
Debit Memo? Informs the seller of the amount the buyer proposes to debit to the account payable due the seller.
Credit Memo? Authorizes a credit to (decrease) the buyers acct.receivable.
Free on Board (FOB) Shipping Point? If ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the freight carrier.
FOB Destination? If ownership of the merchandise passes to the buyer when the buyer receives the merchandise.
FOB Shipping Point Illustration? Seller->Title passes to Buyer->Freight->Buyer=Buyer pays Freight
FOB Destination? Seller->Freight->Freight->Title passes to Buyer->Buyer=Seller Pays Freight
Trade Discounts When wholesalers offer special discounts to certain classes of buyers who order large quantities
Sales? Total amount charged customers for merchandise sold, including cash sales and sales on account.
Net Sales? Net Sales=Sales-Sales Returns-Allowances-Sales Discounts
Account Form Balance Sheet? Assets on left side, liabilities and owner's equity on right
Report Form Balance Sheet? Sheet is prepared in a downward sequence in three sections.
Inventory Shrinkage/Shortage? Loss of inventory due to theft.
Ratio of Net Sales to Assets? Measures how effectively a business is using its assets to generate sales.
Ratio of Net Sales to Assets Formula? Ration of Net Sales=Net Sales/Avg. Total Assets
Purchases? Purchases of inventory are recorded in the Purchases Account rather than in the Merchandise Inventory Account.
Created by: Mheath27