Chapter 6 Operating Cycle and Merchandising Operations

Economics 0710 with Silva at Brown University

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Created: 2011-07-07
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4 parts of the Operating Cycle

1. Purchase of Merchandize inventory for cash or on credit

2. Payment for purchases made on credit

3. Sales of merchandise inventory

4. Collection of cash form credit sales

Cash gap

The period between the time the supplier must be paid and the end of the operating cycle

Financing Period

The amount of time from the purchase of inventory until it is sold and payment is collected, less the amount of time creditors give the company to pay for the inventory.

Perpetual Inventory System

Continuous records are kept of the quantity and the cost of individual items as they are bought and sold.

Connection between Merchandise Inventory and Cost of Goods Sold Account

Under Perpetual: the cost of each item is recorded in the Merchandise Inventory account when purchased. When sold - transferred to Cost of goods sold. MI = CoG and CGS = MS(old)

Periodic Inventory System

The inventory not yet sold or on hand is counted periodically usually at the end of the accounting period. No detailed records are maintained. Inventory figure only accurate on balance sheet date.

Trade Discount

A reduction off their list of catalogue prices

Sales Discount

A discount for early payment intended to increase the seller's liquidity by reducing he amount of money tied up in accounts receivable.

"n/10" or "2/10" = 2%

Purchases Discounts

Discounts that a buyer takes for the early payment of merchandise

FOB Shipping point

The seller places the merchandise "free on board" at the point of origin and the buyer bears the shipping costs.

FOB Destination

Seller bears the transportation costs to the place where merchandise is delivered.

Freight In

-Buyer pays the transportation charge and it is added to the cost of merchandise purchased (increases the cost of merchandise inventory and C.G.S)

Delivery expense or freight-out

When the seller pays the transportation charge

-included in selling expenses on the IS

Purchase on Credit

Merchandise I. debited, A.P credited

Purchase return for credit

A.P debited, M.I credited

Purchase for Cash

Cash credited, MI debited

Sale on Credit

AR and CGS debited; MI and Sales Credited

Sale for Cash

Cash and CGs debited; Sales and MI credited

Sales return for credit

MI and SRA; A.R and CGS credited

Payment on Account

AP debited; Cash credited

Cost of goods available for sale

The total cost of merchandise that could be sold in the accounting period. Two factors:

1. The amount of merchandise on hand at the beginning of accounting period or beginning inventory

2. Net purchases during the period

Net cost of purchases

the sum of net purchases and freight-in

Purchases Account

A temporary account used only with the periodic inventory system. Purpose is to accumulate the total cost of merchandize purchased for resale during an accounting period

About this deck

By: Noni Wang
Created: 2011-07-07
Size: 23 flashcards
Views: 7

About StudyBlue

“Simply amazing. The flash cards are smooth, there are many different types of studying tools, and there is a great search engine. I praise you on the awesomeness.”
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