Chapter 5 ? Merchandising Operations and the Multiple-Step Income Statement Merchandising Operations Retailers Companies that purchase and sell directly to consumers Wholesalers Companies that sell to retailers Sales revenue Primary source of revenue Expenses Cost of goods sold Total cost of merchandise sold during the period Directly related to the revenue recognized from the sale of goods Operating expenses Operating Cycles Cycle of merchandising company ordinarily is longer than that of a service company Purchase of merchandise inventory and its sale lengthen the cycle Flow of Costs Beginning inventory is added to the cost of goods purchased Yields cost of goods available for sale Cost of goods available for sale is assigned to the cost of goods sold (goods sold this period) and ending inventory (goods to be sold in the future) Two systems to account for inventory Perpetual Inventory System Maintain detailed records of cost of each inventory purchase and sale Company determines cost of goods sold each time a sale occurs Periodic Inventory System Cost of goods sold is determined only at the end of the accounting period Perpetual provides better control over inventories than a periodic system Shortages can be discovered and investigated immediately Recording Purchases of Merchandise Every purchase should be supported by a purchase invoice Use the copy of the sales invoice Purchases of merchandise for sale is recorded in Merchandise Inventory account Freight Costs FOB = Free on Board Shipping Point ? buyer pays costs Considered a cost of merchandise Merchandise Inventory is increased Destination ? seller pays costs Operating expense to the seller Increase Delivery Expense or Freight-out accounts Purchase Returns and Allowances Purchase return Return product for credit or cash refund Purchase allowance Keep the merchandise, but seller grants a reduction of purchase price Purchase Discounts Buyer can claim cash discount for prompt payment if listed in credit terms of payment Credit terms Specify amount of cash discount and time period which it is offered 2/10 n/30 2% discount within 10 days of invoice date, net total due after 30 days Discount period is the 10 days passing up discounts may be viewed as paying interest for use of money Recording Sales of Merchandise Every sales transaction should be supported by a business document Cash register tapes provide evidence of cash sales Two entries for each sale Increase accounts receivable/cash and sales account Increase Cost of Goods Sold and decrease Merchandise Inventory Sales Returns and Allowances Transactions where the seller either accepts goods back from purchaser or grants a reduction in the purchase price Sales Returns and Allowances is a contra revenue account to Sales Sakes Discounts Offer a customer a cash discount Income Statement Presentation Single-step income statement All data classified into 2 categories Revenues Operating revenues and non-operating revenues and gains Expenses Cost of goods sold, operating/non-operating expenses and losses Reasons for using single step Company does not realize any type of profit or income until total revenues exceed total expenses Simple and easy to read Multiple-Step Income Statement Often considered more useful since it highlights components of net income Gross Profit Subtract cost of goods sold from net sales Income from Operations Deduct operating expenses from gross profit Net Income Add/subtract results of activities not related to operations Non-operating activities Gains/losses unrelated to company?s main line of operations Evaluating Profitability Gross Profit Rate More meaningful relationship between gross profit and net sales Profit Margin Ratio Measures extent by which selling price covers all expenses Can be improved by increase gross profit rate and/or controlling expenses
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