Chapter 5 Notes-Mgmt - Summary Fundamental Accounting Principles PDF

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Mgmt 1A Chapter 5—Accounting for Merchandising Operations Merchandising Activities 

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Merchandise consist of products (goods) that a company acquires to resell to customers o A merchandiser earns net income by buying and selling merchandise  Wholesaler—intermediary that buys products from manufacturers and sells them to retailers or other wholesalers  Retailer—buys products from manufacturers or wholesalers and sells them to consumers Reporting Income for a Merchandiser o Net income = revenues – COGS – expenses  Net sales – COGS = gross profit – expenses = net income o Gross profit—net sales less cost of goods sold Reporting Inventory for a Merchandiser o Merchandise inventory—products that a company owns and intends to sell Operating Cycle for a Merchandiser o PurchasesMerchandise InventoryCredit SalesAccounts Receivablecash collection o Companies try to keep their operating cycles short because assets tired up in inventory and receivables are not productive Inventory Systems o Inventory—products a company owns and expects to sell in its normal operations  A company’s merchandise available for sale consists of beginning inventory and what it purchases (net purchases)  The merchandise available is either sold (COGS) or kept for future sales (ending inventory) o 2 inventory accounting systems  Perpetual inventory system—continually updates accounting records for merchandising transactions (merch. available for sale and merch. sold)  Periodic inventory system—updates accounting records for merchandise transactions only at the end of a period

Accounting for Merchandise Purchases 

Purchase Discounts o Credit terms for a purchase include the amounts and timing of payments from a buyer and seller o Credit period is the amount of time before full payment is due o Sellers grant cash discounts to encourage buyers to pay earlier  Buyers views cash discount as a purchase discount  Seller views as a sales discount o If pay during discount period, the buyer Dr A/P and Cr Cash and Cr Merch. Inventory

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Purchase Returns and Allowances o When a buyer returns or takes an allowance, they issue a debit memorandum to inform the seller of a debit made to the seller’s account payable in the buyers records o Purchase return—merchandize acquired but then return to seller  Journalizing—first purchase, then return, then pay A/P with cash and merch inv o Purchase allowance—reduction in cost for buyer of defective or unacceptable merch. Transportation Costs and Ownership Transfer o FOB—Freight on board—who pays freight costs and who bears risk of loss during transport—when does ownership transfer from seller to buyer  FOB Shipping Point—buyer accepts ownership when goods leave seller. Buyer responsible for paying shipping costs and bears risk of damage or loss. Goods are part of buyers ownership once shipped.  Owner transfers when goods passed to—carrier  Transportation costs paid by—merchandise inventory  FOB Destination—ownership transfers to buyers when goods arrive at buyer. Seller pays shipping and bears risk of loss or damage. Seller doesn’t record revenue until goods arrive at destination because transaction isn’t complete  Owner transfers when goods passed to—buyer  Transportation costs paid by—delivery expense o Supplementary records refer to info outside the usual general ledger accounts

Accounting for Merchandise Sales 

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Sales of Merchandise o Sales transactions for a seller has 2 parts  Revenue received in the form of an asset from the customer (A/R and sales)  Cost recognized for merchandise sold to the customer (COGS and Merc Inv) Sales Discount o Benefits seller by decreasing delay in receiving cash and reducing future collection effort o Isn’t recorded until customer pays within discount period, because no guarantee customer will earn the discount Sales Returns and Allowances o Sales Returns—returned to seller after a sale o Sales allowances—reducing in selling price of merchandise sold to customers

Completing the Accounting Cycle 

Adjusting Entries for Merchandisers o Need to adjust for loss of merchandise, including theft and deterioration  Shrinkage—loss of inventory (determined by comparing physical inventory to recorded amounts)

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Preparing Financial Statements o Income statement includes COGS expense and gross profit o Balance sheet differs by adding merchandise inventory to assets Closing Entries for Merchandisers o Just add new revenue and expenses (sales, sales discounts, sales returns and allowances, and COGS) and they all need to be closed to income summary to capital Summary of Merchandising Entries

Financial Statement Formats 

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Multiple-Step Income Statement o Shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items o 3 main parts  Gross profit—sales – sales disc – sales ret & allow = net sales  Nets sales – COGS = gross profit  Income from operations—gross profit – operating expenses (selling and general)  Net income is other revenues and gains (interest rev, interest expense) o Operating expenses  Selling—expenses of promoting sales by displaying and advertising merchandise, making sales, delivering goods  General and administrative—support company’s overall operations, accounting, human resource management, financial management o Non-operating activities  Other revenue and gains—interest revenue, dividend revenue, rent revenue, and gains from asset disposals  Other expenses and losses—interest expense, losses from asset disposals, casualty losses Single-Step Income Statement o Revenue – expenses = net income Classified Balance Sheet—add merchandise inventory to assets...