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Questions and Answers
What are merchandising companies?
What are merchandising companies?
Companies that buy and sell goods (rather than sell services)
What are the two types of merchandising companies?
What are the two types of merchandising companies?
Define: Retailer
Define: Retailer
A company that sells its merchandise to customers who are the final consumers of the product.
What are wholesalers?
What are wholesalers?
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There is a difference in how revenue is recorded for wholesalers versus retailers.
There is a difference in how revenue is recorded for wholesalers versus retailers.
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The primary source of revenues is referred to as?
The primary source of revenues is referred to as?
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What tends to be the largest expense on the income statement?
What tends to be the largest expense on the income statement?
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How do we find gross profit?
How do we find gross profit?
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What two things are ignored in the income statement of a service company?
What two things are ignored in the income statement of a service company?
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What is the operating cycle of a service company?
What is the operating cycle of a service company?
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What is the operating cycle of a merchandising company?
What is the operating cycle of a merchandising company?
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The operating cycle of a __________________ company is ordinarily longer than that of a __________________ company.
The operating cycle of a __________________ company is ordinarily longer than that of a __________________ company.
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How do you find the cost of goods available for sale?
How do you find the cost of goods available for sale?
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How do you find cost of goods sold or ending inventory?
How do you find cost of goods sold or ending inventory?
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What are the characteristics of the periodic inventory system?
What are the characteristics of the periodic inventory system?
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How is the calculation of goods sold done in the periodic system?
How is the calculation of goods sold done in the periodic system?
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What are the characteristics of the perpetual system?
What are the characteristics of the perpetual system?
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What are the advantages of the perpetual system?
What are the advantages of the perpetual system?
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When do we record the cost of inventory?
When do we record the cost of inventory?
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What is a purchase invoice?
What is a purchase invoice?
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If a company is given an invoice with inventory, how would they record this in a journal to show perpetual inventory?
If a company is given an invoice with inventory, how would they record this in a journal to show perpetual inventory?
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What does FOB shipping point mean?
What does FOB shipping point mean?
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What does FOB destination mean?
What does FOB destination mean?
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Freight costs incurred by the seller are classified as?
Freight costs incurred by the seller are classified as?
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What is a purchase allowance?
What is a purchase allowance?
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How do we record returns or allowances in the perpetual inventory system for buyers?
How do we record returns or allowances in the perpetual inventory system for buyers?
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In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting?
In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting?
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What are the advantages of purchase discounts?
What are the advantages of purchase discounts?
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What does this mean: 2/10, n/30?
What does this mean: 2/10, n/30?
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What does this mean: 1/10 EOM?
What does this mean: 1/10 EOM?
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What does this mean: n/10 EOM?
What does this mean: n/10 EOM?
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The cost of goods sold is determined and recorded each time a sale occurs in a perpetual inventory system.
The cost of goods sold is determined and recorded each time a sale occurs in a perpetual inventory system.
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Why are sales discounts offered?
Why are sales discounts offered?
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What quality of earnings ratio might a company have if it is using more aggressive accounting techniques to accelerate income recognition?
What quality of earnings ratio might a company have if it is using more aggressive accounting techniques to accelerate income recognition?
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Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. What is one effect when Cosmos pays its bill on July 21?
Cosmos Corporation, which uses a perpetual inventory system, purchased $2,000 of merchandise on July 5 on account. Credit terms were 2/10, n/30. It returned $400 of the merchandise on July 9. What is one effect when Cosmos pays its bill on July 21?
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When recording the sale of goods for cash in a perpetual inventory system, what entries are made in the journal?
When recording the sale of goods for cash in a perpetual inventory system, what entries are made in the journal?
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Sales revenue less gross profit results in?
Sales revenue less gross profit results in?
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Study Notes
Merchandising Companies
- Merchandising companies are businesses that buy and sell goods instead of services.
- Two main types: retailers and wholesalers.
- Retailers sell directly to final consumers (e.g., Walmart), whereas wholesalers sell to retailers.
Revenue Recognition
- Both retailers and wholesalers record revenue in the same manner.
- Primary source of revenue is called sales revenue or simply revenue.
Income Statement Insights
- The largest expense typically found on an income statement is the cost of goods sold (COGS), listed first.
- Gross Profit is calculated by subtracting Cost of Goods Sold from Revenues.
Service Company vs. Merchandising Company
- Service companies do not report COGS or Gross Profit on their income statements.
- The operating cycle for a service company involves cash flows from performing services to collecting accounts receivable.
- Merchandising companies have a longer operating cycle including purchasing inventory, selling it, and collecting cash from customers.
Inventory Calculations
- Cost of Goods Available for Sale is computed as Beginning Inventory plus Cost of Goods Purchased.
- To determine COGS or Ending Inventory, subtract COGS from Goods Available for Sale.
Inventory Systems
-
Periodic Inventory System:
- Does not maintain detailed records; COGS is determined at the end of the accounting period via a physical count.
-
Perpetual Inventory System:
- Keeps detailed records of every inventory purchase and sale. Each sale updates inventory instantly.
Perpetual System Advantages
- Offers ongoing insights into inventory quantities and costs.
- Provides superior control and measurement compared to a periodic system.
- Commonly used for high unit value merchandise.
Inventory Transactions
- Inventory cost is recorded when goods are received from the seller.
- A purchase invoice provides details about the goods and the associated costs.
Inventory Ownership and Freight Terms
- FOB Shipping Point: Buyer assumes ownership and pays freight costs once goods are accepted by the carrier.
- FOB Destination: Seller retains ownership until the goods reach the buyer; the seller covers transportation costs.
Purchase Allowances and Discounts
- A Purchase Allowance allows buyers to keep goods with a price reduction from the seller.
- Returns or allowances reduce the inventory account, credited in the perpetual inventory system.
- Purchase discounts benefit both buyers (cost saving) and sellers (faster cash conversion).
Payment Terms
- 2/10, n/30: 2% discount if paid within 10 days; otherwise, the full amount is due in 30 days.
- 1/10 EOM: 1% discount if paid within the first 10 days of the following month.
- n/10 EOM: Full amount due within the first 10 days of the next month.
Accounting for Sales
- In a perpetual inventory system, when goods are sold for cash, two journal entries are made: one for sales revenue and another for recording COGS and reducing inventory.
Quality of Earnings
- A quality of earnings ratio significantly less than 1 may indicate aggressive accounting practices to accelerate income recognition.
Practical Example
- If Cosmos Corporation, using a perpetual system, bought $2,000 worth of merchandise, returned $400, and pays its bill later under credit terms of 2/10, n/30, the cash credited when paying would be $1,600.
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Test your knowledge on Merchandising Companies with these flashcards. Explore definitions and examples related to retailers and wholesalers. Perfect for mastering Chapter 5 in Financial Accounting.