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Chapter 5 - Merchandising Companies.doc

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ACC 100
Ron Babin

CHAPTER 5 RECORDING PURCHASES AND SALES LEARNING OBJECTIVES 1. Apply the revenue recognition principle (MASTER) 2. Apply the matching principle to recognize expenses (MASTER) 3. Describe the basic format and the content of the income statement. (UNDERSTAND) 4. Identify the differences between service and merchandising companies. (SCAN) 5. Prepare entries for purchases under a perpetual inventory system. (MASTER) 6. Prepare entries for sales under a perpetual inventory system. (MASTER) CHAPTER OUTLINE Learning Objective 1: Apply the revenue recognition principle. (MASTER) Learning Objective 2: Apply the matching principle to recognize expenses. (MASTER) Learning Objective 3: Describe the basic format and the content of the income statement. (UNDERSTAND) Read pages 204 - 210 (BEFORE NET SALES on page 210) in the textbook: Financial Accounting, The Impact on Decision Makers, Second Canadian Edition, by Porter, Norton, Chesley & Song-Bauld. Learning Objective 4 - Identify the Differences Between Service and Merchandising Companies (SCAN) In a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales. Unlike expenses for a service company, expenses for a merchandising company are divided into two categories: Cost of goods sold - the total cost of merchandise sold during the period. Sales revenue less cost of goods sold is called gross profit. Operating expenses - expenses that are incurred in the process of earning sales revenues.. Gross profit less operating expenses is net earnings (or net loss). Think of examples of service companies and merchandising companies in the local area. Consider other examples than those used in the textbook! Consider hair salons, banks, service stations, funeral homes, etc. as service companies. Consider department stores, grocery stores, bookstores, etc. as merchandising companies. The yellow pages of the phone book can be a good resource. Two systems to account for inventory Perpetual Detailed records of the cost of each inventory purchase and sale are maintained. Cost of goods sold is determined each time a sale occurs. Provides better control over inventory. Periodic Detailed records are not kept throughout the period. Cost of goods sold determined only at the end of the accounting period, when a physical inventory count is taken. Think about different types of businesses that would use perpetual and periodic inventory systems. Automobile dealers and jewellers use a particular type of perpetual inventory system where they track specific items of inventory. Large retailers (grocery stores and department stores) scan merchandise when it is sold, and can easily keep track of the numbers of inventory items. The small corner store may not have the same ability, and may use a periodic inventory system. In this course you will learn only the perpetual method of recording purchases and sales. However, the difference between the two methods, as well as the benefits and drawbacks, are at the SCAN level of knowledge.
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