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Accounting (12)
Xi Wang (1)
Chapter 5

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Department
Accounting
Course
33:010:272
Professor
Xi Wang
Semester
Fall

Description
Introduction To FinancialAccounting Sarath Fall 2013 Lecture 7: Chapter 5 Merchandizing firms buy and sell goods and make a profit on the difference between the buying and selling price. Such firms can be wholesalers (sell only to other merchandizing firms) or retailers (sell to customers). The operating revenues for a merchandizing firm come from its core operations of buying and selling merchandize. A secondary source of revenue is from interest from a credit card operation. The expenses are split into three (1) COGS (2) Operating expenses and (3) Other expenses (See illustration 5-11, p 212.) Before discussing the details of accounting for merchandizing operations, we begin with some basics about accrual accounting. Revenue and expenses are ____ the same as cash in and cash out. The differences between the sum total of cash flows (carried in the cash account) and the sum total of all earnings (carried in RE -- note that for conceptual reasons, we are assuming dividends paid are 0) is accrued on the balance sheet. The basic balance sheet equation: Assets = Liabilities + Stockholders equity may be rewritten as Cash + non Cash assets = Liabilities + Contributed Capital + Retained Earnings or as Cash - Retained Earnings = Liabilities + Contributed Capital - non Cash assets We shall track this identity for merchandize transactions. 1) Firm Issues Stock for $1,000. 2) Firm purchases $100 of inventory 3) Firm sells inventory on account for $200. 4) Firm collects Cash of $200 1 Introduction To FinancialAccounting Sarath Fall 2013 Most firms track inventory very closely and have detailed information about goods (Walmart uses Radio tags on merchandize). However, for financial accounting purposes, the periodic system is usual. Under the periodic system, the COGS is estimated based on the ending balance counted at the end of the period (hence the name periodic method). In contrast, under the perpetual method, the COGS is measured continuously and the end balance is estimated based on the COGS. Both methods rely on the following equation: Begin Balance + Purchases - COGS = End Balance. Begin Balance and purchases are based on journal entries. Under the perpetual method COGS is based on Journal entries and the End balance is calculated. In contrast, under the periodic method, COGS is an adjusting entry based on the end inventory. Measuring Cost of Purchases The total cost of purchases includes all freight and insurance. Freight charges may be paid by the buyer (Free on Board Shipping) or by the seller (Free on Board Destination) based on whether the seller pays nothing to place it on board or the buyer pays nothing to take it off the shipper. Another issue relates to discounts that are provided for (a) Bulk purchases or (b) pay on time Purchase price is usually measured net of discount. You will not be tested on the net method of treating purchase discounts -- however, you will be expected to know the difference between the two methods which is: The net method initially values the purchased goods net of discount and takes a loss if the discount is not taken whereas the gross method values the purchased goods at full cost and reduces the cost of inventory if the discount is taken. Measuring Sales Revenue Sales Revenue must be adjusted for possible returns and sales discounts. Sales returns is a contra-revenue account and is debited whenever goods are returned. Ship 100 items at $10 expect 5 returned AR 1000 SALES REV 1000 Sales Rev 50 Allowance for Returns 50 Net sales rev=950 2 Introduction To FinancialAccounting Sarath Fall 2013 E5-3. On September 1, Howe Office Supply had an inventory of 30 calculators at a cost of $18 each. The company uses a perpetual inventory system. During September, the following transactions occurred. Purchased 80 calculators at $20 each from DeVito Co. for cash. Dr Inventory 1600 Paid freight of $80 on calculators purchased from DeVito Co.
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