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accounting ch 4


How do merchandising & service firms differ? two big accounting issues: inventory and cost of goods sold (COGS)
wholesaler is an intermediary that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers
retailer an intermediary that buys products from manufacturers or wholesalers and sells them to consumers. Many retailers sell both products and services
Accounting term for revenue of merchandise sales
costs of goods sold (COGS) the expense of buying and preparing the merchandise
Gross Profit or Gross Margin equals net sales minus costs of goods sold. GM/GP=net sales-COGS
computing income for merchandising company Net Sales-COGS=GP-Expenses=Net Income
Merchandise Inventory refers to products that a company owns and intends to sell. It is a current asset
perpetual inventory system continually updates accounting records for merchandising transactions-specifically for those records of inventory available for sale and inventory sold
Purchase discounts (credit terms) a purchase that includes the amounts and timing of payments from a buyer to a seller. 2/10 means 2%discount if paid in 10 days. n/30 means the total amount is due in 30 days
Purchase Returns inventory returned to the seller
Purchase allowances credit for damaged inventory kept by the buyer (may sell at discount)
FOB- free on board designation determines who pays and when ownership rights transfer
FOB Shipping Point buyer pays, buy owns at shipping point
FOB Destination seller pays, seller owns until destination
Sales of Merchandise involves two parts: (1) revenue received in the form of an asset from the customer. (2) recognition of the cost of merchandise sold to the customer
what kind of an account is sales discount contra-revenue account
sales discount on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts
sales allowance gives price reduction to buyer for defective merchandise
Accounting Cycle: differences for merchandising firm (1) inventory: current asset on balance sheet (2)COGS: cost/expense on income statement (3) Adjustment for shrinkage (4) income statement formats (single step&multi-step)
Shrinkage refers to the loss of inventory and it is computed by comparing a physical count of inventory with recorded amounts
multiple-step income statement format shows detailed computations of net sales and other costs and expenses and reports subtotals for various classes of items
single-step income statement lists costs of goods sold as another expense and shows only one subtotal for total expenses
Gross Margin Ratio (or Gross Profit Ratio)*will be on exam gross margin as percentage of sales Gross Margin Ratio=(net sales-COGS)/net sales
Acid Test Ratio (or Quick ratio) (cash+short-term investments+current receivables)/current liabilities
Created by: asitov
Popular Accounting sets




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