ACC 207 Block 2

37 terms by markod18 

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Merchandising

primary source of revenue is selling merchandise (markup of goods)

Expenses of Merchandising

Cost of Goods Sold and Operating Expenses

Cost of Goods Sold

total cost of merchandise

Operating Expenses

selling and administrative expenses

Perpetual System

records of cost of each inventory purchase and sale are maintained continuously, as well as records continuously show inventory (physical inventory to determine what is left/how much sold); determines COGS after every sale

Periodic System

records of goods on hand are not kept on hand throughout the period; determines COGS at end of accounting period

Recording Purchases of Merchandise

every purchase should be supported by business documents; every credit purchase will have purchase invoice; cash purchase is recorded by increasing inventory and decreasing cash

Freight Costs

FOB Shipping Point and FOB Destination

FOB Shipping Point

buyer pays for freight costs; part of purchasing inventory - increase inventory and decrease cash; in determining ownership of goods, ownership passes to buyer

FOB Destination

seller pays for freight costs; freight-out or delivery expense; increase freight-out and decrease cash; in determining ownership of goods, ownership passes when the product reaches the buyer

Return Inventory

purchase return; increase accounts payable and decrease inventory when returning; when receiving a return, increase inventory and decrease accounts payable

Purchase Allowance

keep defected product and will receive discount from seller

Purchase Discount

credit terms of a purchase on account may allow the buyer to claim a discount if prompt payment is made
ex.) 3/15, n/30 (3% off returned price if returned within 15 days, payment due in 30 days no matter what)

Recording Sales of Merchandise

sales revenues recorded when earned (sales may be credit or cash)

Cash Register Tapes vs. Sales Invoice

provides evidence of cash sales vs. provides written evidence of credit sales

Sales Discount

seller may offer a cash discount for the prompt payment of the balance due; based on invoice
Debit:
Cash (amount to be collected - discount)
Sales Discount (amount) ex.) 2% x $3500) - contra-revenue
Credit:
Accounts Receivable (whole amount of bill)

Profit Margin

Net Income / Net Sales = %

Gross Profit Rate

Gross Profit / Net Sales = %

Merchandise Inventory

many different items make up inventory

Work in Progress

product that is in production and not yet complete

Manufacturing (3 parts)

Raw Materials; Work in Progress; Finished Goods

Perpetual System Determining Inventory

at year end, 1.) check accuracy and 2.) determine amount lost

Periodic System Determining Inventory

physical inventory to 1.) find inventory on hand at balance sheet date and 2.) determine Cost of Goods Sold for the period

COGS Example

Beginning Inventory $10000
+ Purchases 100000 =
COG Available for Sale $110000
- Ending Inventory (20000) =
COGS $90000

Inventory Costing

after determining quantity of ending inventory, apply unit cost to the unit quantities to determine total cost of ending inventory and COGS

FIFO

first in, first out; earliest goods purchases are first ones sold; highest net income (work from bottom to top)

LIFO

last in, first out; last goods purchased are first ones sold; highest COGS and lowest net income (work from top to bottom)

Average Cost

Goods Available for Sale / Units Available for Sale = $x/unit
$x/unit * units in ending inventory = $x ending inventory

LCM

Lower of Cost or Market; value of inventory less than cost, mark down to market value (concept of conservatism)

Inventory Turnover Ratio

COGS / Average Inventory = x times
Avg Inventory = (beg inventory + end inventory) / 2

Days in Inventory Ratio

365 / Inventory Ratio = x days

Fraud

dishonest act by employee for personal benefit at cost of employer

3 Factors to Fraud

1. Opportunity: lack of sufficient controls provides opportunity for employee
2. Financial Pressure: personal debt, want of a better lifestyle, etc. pressures employee
3. Rationalization: employee justifies fraud in their mind

Sarbanes-Oxley Act (2002) and Fraud

requires adequate system of internal control to be put in place in order to stop fraud

Components Internal Control (5)

1. Control environment
2. Risk Assessment
3. Control activities
4. Information ad Communication
5. Monitoring

Principals of Internal Control to Cash Receipts (6)

1. Establishment of responsibility
2. Segregation of duties
3. Documentation procedures (provides evidence)
4. Physical controls (safe/vault, security system, alarms)
5. Independent Internal Verification (review of data prepared by employees)
6. Human Resource Controls (background checks, employee/manager rotation, required vacations)

Basic Principles of Cash Management (5)

1. Increase speed of receivable collection (more quickly received, more quickly $ can be spent)
2. keep inventory levels low (large inventory ties up cash)
3. Monitor payment of liabilities (restrict late payments)
4. Plan timing of major expenditures (help obtain outside financing)
5. Invest idle cash (invest to earn)

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