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Accounting 201

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Michael Andrei

on 20 March 2014

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Transcript of Accounting 201

Service vs. Merchandising Companies

Service Company: Uses employees to provide service for the customer
Operating Cycles
Perpetual System
Accounting 201
Chapter 5: Accounting for Merchandising Operations

By: Rhea-Alexis Alabado, Michael Carroll and Michael Andrei

Merchandising Company: Purchases inventory items to resell to customers
Walmart, Kmart, Target
SportClips, United Airlines, Marriott
Perpetual Inventory System

Companies keep detailed records of the cost of each inventory purchase and sale
These records show the inventory that should be on hand for every item
Ex1: Ford dealership has separate inventory records for each automobile in
its lot and showroom floor
Ex2: Kroger grocery store uses bar codes and optical scanners to keep record of every box of cereal and jar of jelly that it buys and sells

Multiple-Step Income Statement
Shows the various steps in determining net income
Distinguishes between operating and non-operating activities
Highlights intermediate components of income and sub-groupings of expenses
Presentation of Sales
Gross Profit
Gross Profit Rate =
Gross Profit/Net Sales
Operating Expenses & Net Income
Non-operating Activities
Other Revenue and Gains
Other Expenses and Losses
Single-Step Income Statement
Includes only Revenues and Expenses
Company sees no profit until total revenues exceed total expenses
Simpler and easier to read
Classified Balance Sheet
The operating cycle of merchandising companies is ordinarily longer than the service company's cycle
This is largely due to the purchase of merchandise inventory and its eventual sale
Merchandising companies can use one of two systems to account for inventory, perpetual inventory system or a periodic inventory system
Sales Returns and Allowances
 Contra-Revenue Accounts
• Sales Returns and Allowances is a contra-revenue account to sales
• The normal balance of the Sales Returns and Allowances is a debit
• Companies use the contra-revenue account, instead of debiting Sales, to disclose in the accounts and in the income statement the amount of sales returns and allowances.

 Sales Discounts
• Some companies may offer a sales discount if the account owed is paid off in time
• To the buyer this is known as a purchase discount

Purchase Discounts

• Purchase Discounts offers advantages to both parties, the purchaser saves money while the seller shortens the operating cycle by quickly converting the accounts receivable into cash.

• Credit terms specify the amount of cash discounted and the time period in
which it needs to be paid by.

• Exp. If the terms are 2/10 n/30 (two-ten, net thirty) Then the buyer may take a 2% cash discount if the payment is paid within 10 days. If it is not paid off in ten days the buyer has 30 days to pay with no discount.

Record Revenue Only
Income Measurement Process for Merchandising Company
The items in the two blue boxes are unique to merchandising companies
Periodic Inventory System
Companies do not keep detailed records of goods on hand during the accounting period
Cost of Goods sold is determined at the end of the accounting period
Cost of Goods on Hand beginning + Cost of Goods Purchased- Cost of Goods on Hand ending
Full transcript