ACC 100 Chapter Notes - Chapter 5: Gross Profit, Current Asset, Finished Good
13 Jun 2018
School
Department
Course
Professor
ACC 100- Week 5
Merchandising Businesses
What are merchandising businesses?
- different than service companies
- difference is that they buy and sell inventory
- multi-step income statements
Inventory
- a finished good that a company buys to resell to customers
- asset- owned and has future benefit
- usually current asset
- when sold, it becomes and expense under costs of goods sold
Wholesalers
- buys large quantities of goods from manufacturers, warehouses them, and then resells them
to retailers
Equations
- retailers sell inventory for more than they buy it for in order to make a profit
Selling Price = cost + (cost x markup %)
Gross profit (GP) = Selling Price - Cost
gross profit ratio: (gross profit / sales revenue * 100)
Difference between profit and gross profit
Product Costs
- all the costs that are incurred to purchase inventory
- would include the cost of the actual inventory purchased but also all the costs necessary to
get the inventory onto your shelf, like shipping costs to get the inventory to your location
Period Costs
- Period costs are the expenses that are incurred to allow the business to run. Examples are
the rent you pay for your store location, your advertising costs, and the salary of the sales
people
- if something is not a product cost, it is a period cost
So…..
find more resources at oneclass.com
find more resources at oneclass.com
Gross profit is the profit made from the product subtract the product costs.
What systems do merchandisers use to track inventory?
Perpetual Inventory System
- records every purchase and sale of inventory when it happens
- computerized
- computer system scans inventory in when it's received and out when it's sold
How are Inventory PURCHASES recorded in a perpetual system?
On June 15 you purchase 20 hats for $5 each, paying cash. The total amount of the
transaction was $100 (20 * $5).
What did the business get? Hats, which are owned, can be sold in the future for a higher
price, and are due to a past transaction, which means they are an asset. What account should
you use to record the purchase? Since you plan to sell the hats to customers they are
considered inventory, products that are ready for sale. The inventory account is increased
when you buy inventory and decreased when you sell inventory (hats in this case).
What did the business give away? Cash, so the cash account will decrease because it's gone
and therefore has no future benefit for the business.
Let's record this activity into the expanded accounting equation using account names.
find more resources at oneclass.com
find more resources at oneclass.com
How are Inventory SALES recorded in a perpetual system?
On June 24 you sell 15 hats to your customers for $20 each. The customers pay cash.
Revenue is always recorded using the selling price of the inventory, which was $20 each
times the number of hats sold.
What account should you use? When you sold a service you recorded the revenue as Service
Revenue. When you sell a good you record the revenue as Sales Revenue. Sales revenue
increases by $300 (15 * $20).
Let's record this activity into the expanded accounting equation using account names.
Entry 1:
Cash INCREASES by the selling price times the number of units sold.
Sales revenue INCREASES by the same amount.
Entry 2:
Cost of Goods Sold INCREASES by the cost ($5) times the number of units sold (15) (but
remember that it will DECREASE equity once you flow it up through the equation).
Inventory DECREASES by the same amount.
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Difference is that they buy and sell inventory. A finished good that a company buys to resell to customers. When sold, it becomes and expense under costs of goods sold. Buys large quantities of goods from manufacturers, warehouses them, and then resells them to retailers. Retailers sell inventory for more than they buy it for in order to make a profit. Selling price = cost + (cost x markup %) Gross profit (gp) = selling price - cost gross profit ratio: (gross profit / sales revenue * 100) All the costs that are incurred to purchase inventory. Would include the cost of the actual inventory purchased but also all the costs necessary to get the inventory onto your shelf, like shipping costs to get the inventory to your location. Period costs are the expenses that are incurred to allow the business to run.
