Fundamentals of Accounting, Business & Management PDF

FUNDAMENTALS OF ACCOUNTING, BUSINESS & MANAGEMENT EARL ESCAREAL SHS & COLLEGE LECTURER Business Transactions in the Merchandising Industry & the Accounting Cycle  The Accounting Cycle for the Merchandising business is the same as that of the Service Industry except:  It recognizes Inv...

FUNDAMENTALS OF ACCOUNTING, BUSINESS & MANAGEMENT EARL ESCAREAL SHS & COLLEGE LECTURER Business Transactions in the Merchandising Industry & the Accounting Cycle  The Accounting Cycle for the Merchandising business is the same as that of the Service Industry except:  It recognizes Inventories which are purchased and sold  It utilizes a Multi-Step Income Statement  It has additional accounts to close at the end Business Transactions in the Merchandising Industry & the Accounting Cycle  Two systems are used when in the Merchandising Industry:  Under the Periodic Inventory System, no entries are made to the merchandise inventory or cost of goods sold account during the year. Thus, the balance in the merchandise inventory account is based on the physical count of inventory taken at the end of the last accounting period. The merchandise inventory and the cost of goods sold for the current period are not determined until the end of the current accounting period, when a physical inventory is taken. At that time, a formula is applied to calculate cost of goods sold. Business Transactions in the Merchandising Industry & the Accounting Cycle  Under the Perpetual Inventory System, entries are made to the merchandise inventory and cost of goods sold accounts as transactions take place during the accounting period. The merchandise inventory account is debited for the cost of all goods purchased, including freight charges, and credited for the cost of all goods sold. In addition, this account is debited when customers return merchandise and is credited when suppliers grant returns, allowances, and discounts. Thus, the balance of the account represents the cost of goods on hand at all times. The cost of goods sold account is debited when merchandise is sold and credited when customers return merchandise. Thus, the balance of the account reflects the cost of goods sold at any point during the accounting period. No year-end adjusting entry is necessary as long as the physical inventory agrees with the amount reported in the merchandise inventory account. Business Transactions in the Merchandising Industry & the Accounting Cycle Business Transactions in the Merchandising Industry & the Accounting Cycle  The following four inventory methods have become generally accepted for answering this question:  Specific identification  First-in, first-out (FIFO)  Weighted-average  Last-in, first-out (LIFO)  These methods may be applied under the periodic or perpetual inventory systems. Business Transactions in the Merchandising Industry & the Accounting Cycle Business Transactions in the Merchandising Industry & the Accounting Cycle  Assume the following situation for the various methods of computation: Business Transactions in the Merchandising Industry & the Accounting Cycle  Specific Identification: Business Transactions in the Merchandising Industry & the Accounting Cycle  First-In, First-Out (FIFO): Business Transactions in the Merchandising Industry & the Accounting Cycle  Last-In, First-Out (LIFO): Business Transactions in the Merchandising Industry & the Accounting Cycle  Weighted Average Method:  Consider the bicycle inventory data again. The average cost of identical units is determined by dividing the total cost of units available for sale ($16,500) by the total number of units available for sale (250).  There is a logical appeal to the weighted-average method of allocating cost between goods sold and goods on hand. In this example, one-fifth (50) of the total units available (250) were unsold. The weighted-average method assigns one-fifth ($3,300) of the total cost ($16,500) to these goods. Business Transactions in the Merchandising Industry & the Accounting Cycle  Weighted Average Method:  Consider the bicycle inventory data again. The average cost of identical units is determined by dividing the total cost of units available for sale ($16,500) by the total number of units available for sale (250).  There is a logical appeal to the weighted-average method of allocating cost between goods sold and goods on hand. In this example, one-fifth (50) of the total units available (250) were unsold. The weighted-average method assigns one-fifth ($3,300) of the total cost ($16,500) to these goods. Business Transactions in the Merchandising Industry & the Accounting Cycle  So, assuming 200 bicycles were sold using the Periodic Inventory Method: Business Transactions in the Merchandising Industry & the Accounting Cycle  The Multi-Step Income Statement is commonly used for merchandising businesses. The term “multiple-step” is used because the final net income is calculated on a step-by-step basis. Gross sales is shown first, less sales returns and allowances and sales discounts. This difference is called net sales. (Many published income statements begin with the amount of net sales.) Cost of goods sold is subtracted next to arrive at gross profit (sometimes called gross margin). Operating expenses are then listed and subtracted from the gross profit to compute income from operations (sometimes called operating income). Operating expenses are directly associated with providing the primary goods and services of the business. Some companies divide operating expenses into subcategories.  Relevant to such, the Closing Process will then have to consider closing additional Revenue and Expense Accounts (Temporary or Nominal Accounts). Business Transactions in the Merchandising Industry & the Accounting Cycle Business Transactions in the Merchandising Industry & the Accounting Cycle References  Brigham, E.F., Houston, J.F.; 2009; Fundamentals of Financial Management; Ohio, U.S.A.  Heintz, J.A., Parry Jr., R.W.; 2011; College Accounting; Ohio, U.S.A.  Kotler, P., Armstrong, G.; 2012; Principles of Marketing; New Jersey, U.S.A.  Philips, F., Libby, R., Libby P.A.; 2011; Fundamentals of Financial Accounting; New York, U.S.A.  Walker, J.; 2006; Fundamentals of Management Accounting; Massachusetts, U.S.A.  Wild, J.J., Shaw, K.W, Chiappetta, B.; 2018; Financial and Managerial Accounting: Information for Decisions; New York, U.S.A.