Textbook Notes (381,200)
CA (168,393)
UTSC (19,323)
MGA (381)
MGAB01H3 (127)
G.Quan Fun (21)
Chapter 5

Chapter 5 notes

4 Pages
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Department
Financial Accounting
Course Code
MGAB01H3
Professor
G.Quan Fun

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Chapter 5 Merchandising Operations Notes
Merchandising Operations
x operating cycle : the time required to go from cash to cash in producing revenues
x sales revenue : the main source of revenue in a merchandising company
x cost of goods sold : the total cost of merchandise sold during the period; in a perpetual inventory system, it is calculated and
recorded for each sale; in a periodic inventory system, it is calculated at the end of the accounting period by deducting ending
inventory from the cost of goods available for sale
x gross profit : sales revenue less cost of goods sold
x operating expenses : expenses incurred in the process of earning sales revenue; they are deducted from gross profit to arrive at
earnings from operations
Inventory Systems
Perpetual Inventory System
x perpetual inventory system : a detailed inventory system in which the quantity and cost of each inventory item is maintained;
the records continuously show the inventory that should be on hand and the cost of the items sold
x when inventory items are purchased, the purchased item is recorded by debiting (increasing) the Merchandise Inventory account
x when merchandise inventory is later sold, the COGS is obtained from the inventory records
x this cost is transferred from the account Merchandise Inventory (an asset) to the account Cost of Goods Sold (an expense)
Periodic Inventory System
x periodic inventory system : an inventory system in which detailed records are not maintained and the ending inventory and cost
of goods sold are determined only at the end of the accounting period
x to determine the cost of goods sold under a periodic inventory system, the following steps are necessary:
x cost of goods available for sale : the sum of beginning inventory and the cost of goods purchased
Recording Purchases of Merchandise
x cash purchases should be supported by a cash register receipt indicating the items purchased and amounts paid
x cash purchases are recorded by an increase (debit) in Merchandise Inventory and a decrease (credit) in Cash
x credit purchases should be supported by a purchase invoice that indicates the total purchase price and other relevant information
x original copy of invoice goes to buyer to be used as purchase invoice, and copy is kept by seller to be used as sales invoice
x the buyer would record an increase (debit) in Merchandise Inventory and an increase (credit) in Accounts Payable
Sales Tax
x sales tax are collected by most merchandising and service companies on the goods they sell and the services they provide
x when merchandising companies purchase goods for resale, they pay GST on the cost of the goods, however, because companies
can get back any GST they pay on purchases (by offsetting it against the GST they collect from customers), this cost is not part
of the cost of the merchandise
x PST, on the other hand, is never paid by a merchandiser on goods it purchases for resale—it is paid only by the final consumer
x sales taxes add much complexity to the accounting process, and not all companies and their goods and services are taxable
Freight Costs
x invoice should indicate whether seller or the buyer must pay the cost of transporting the goods to the buyer’s place of business
x freight terms state who pays the freight charges and who is responsible for the risk of damage to the merchandise during transit
x FOB (free on board) shipping point : freight terms indicating that the seller is responsible for the goods only until they reach
their shipping point (normally the seller’s place of business); the buyer will pay for the shipping costs of the goods from the
shipping point until they arrive at their destination
x FOB (free on board) destination : freight terms indicating that the seller will pay for the shipping costs of the goods until they
arrive at their destination (normally the buyer’s place of business)
Purchase Returns and Allowances
x purchase returns and allowances : a return of goods for cash or credit, or a deduction granted by the seller on the selling price
of unsatisfactory merchandise; when the result is a decrease in the cost of goods purchased
Discounts
x quantity discount : a price reduction that reduces the invoice price and is given to the buyer for volume purchases
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Description
Chapter 5 Merchandising Operations Notes Merchandising Operations N operating cycle : the time required to go from cash to cash in producing revenues N sales revenue : the main source of revenue in a merchandising company N cost of goods sold : the total cost of merchandise sold during the period; in a perpetual inventory system, it is calculated and recorded for each sale; in a periodic inventory system, it is calculated at the end of the accounting period by deducting ending inventory from the cost of goods available for sale N gross profit : sales revenue less cost of goods sold N operating expenses : expenses incurred in the process of earning sales revenue; they are deducted from gross profit to arrive at earnings from operations Inventory Systems Perpetual Inventory System N perpetual inventory system : a detailed inventory system in which the quantity and cost of each inventory item is maintained; the records continuously show the inventory that should be on hand and the cost of the items sold N when inventory items are purchased, the purchased item is recorded by debiting (increasing) the Merchandise Inventory account N when merchandise inventory is later sold, the COGS is obtained from the inventory records N this cost is transferred from the account Merchandise Inventory (an asset) to the account Cost of Goods Sold (an expense) Periodic Inventory System N periodic inventory system : an inventory system in which detailed records are not maintained and the ending inventory and cost of goods sold are determined only at the end of the accounting period N to determine the cost of goods sold under a periodic inventory system, the following steps are necessary: N cost of goods available for sale : the sum of beginning inventory and the cost of goods purchased Recording Purchases of Merchandise N cash purchases should be supported by a cash register receipt indicating the items purchased and amounts paid N cash purchases are recorded by an increase (debit) in Merchandise Inventory and a decrease (credit) in Cash N credit purchases should be supported by a purchase invoice that indicates the total purchase price and other relevant information N original copy of invoice goes to buyer to be used as purchase invoice, and copy is kept by seller to be used as sales invoice N the buyer would record an increase (debit) in Merchandise Inventory and an increase (credit) in Accounts Payable Sales Tax N sales tax are collected by most merchandising and service companies on the goods they sell and the services they provide N when merchandising companies purchase goods for resale, they pay GST on the cost of the goods, however, because companies can get back any GST they pay on purchases (by offsetting it against the GST they collect from customers), this cost is not part of the cost of the merchandise N PST, on the other hand, is never paid by a merchandiser on goods it purchases for resaleit is paid only by the final consumer N sales taxes add much complexity to the accounting process, and not all companies and their goods and services are taxable Freight Costs N invoice should indicate whether seller or the buyer must pay the cost of transporting the goods to the buyers place of business N freight terms state who pays the freight charges and who is responsible for the risk of damage to the merchandise during transit N FOB (free on board) shipping point : freight terms indicating that the seller is responsible for the goods only until they reach their shipping point (normally the sellers place of business); the buyer will pay for the shipping costs of the goods from the shipping point until they arrive at their destination N FOB (free on board) destination : freight terms indicating that the seller will pay for the shipping costs of the goods until they arrive at their destination (normally the buyers place of business) Purchase Returns and Allowances N purchase returns and allowances : a return of goods for cash or credit, or a deduction granted by the seller on the selling price of unsatisfactory merchandise; when the result is a decrease in the cost of goods purchased Discounts N quantity discount : a price reduction that reduces the invoice price and is given to the buyer for volume purchases www.notesolution.com
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