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chapter 5
Special Issues for
Merchants
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check list and key terms
Following is a "checklist" of selected key concepts that are likely to be included on an exam. Review and check-off each noted item to be certain that important concepts have not been overlooked in your study.
Know that only sales of merchandise are included in the Sales account.
What is an invoice?
How are sales returns and allowances presented on an income statement?
Define the term "contra revenue."
Distinguish between list price and invoice price, and note the term "trade discount."
Are trade discounts entered in the accounting records?
Know the normal method (e.g., 2/10, n/30) for expressing a cash discount.
How should one account for cash discounts on sales?
What three key amounts enter into the computation of cost of goods sold, and how?
When would a debit memorandum be issued?
How are purchase returns and allowances and purchases discounts presented on the income statement?
Distinguish, in detail, between the gross and net methods of accounting for cash discounts on purchases, and know how such discounts appear in the income statement.
Carefully review freight related terminology, and describe who must pay and bear the cost of freight.
What is the difference between a periodic and perpetual inventory system?
Know the closing entries for a merchandising concern.
Note the many important differences between the single- and multiple-step income statements.
Be able to prepare a comprehensive income statement for a merchandising concern, with special emphasis on the calculation and positioning of amounts like gross profit, freight-out, and so forth.
KEY TERMS AND DEFINITIONS (with links to discussion in text)
| cash discount | A reduction in invoice price offered to customers to encourage prompt payment of invoices |
| cost of goods sold | The total cost attributed to units of inventory actually sold during a period |
| credit memorandum | A seller-prepared document evidencing an approved return of merchandise for credit against an account |
| debit memorandum | A purchaser-prepared document evidencing a return of merchandise to a seller |
| F.O.B. destination | Free on Board destination; meaning the transfer of ownership of inventory will occur when the goods reach their destination and the seller will incur the freight charges |
| F.O.B. shipping point | Free on Board shipping point; meaning the transfer of ownership of inventory will occur when the goods are shipped and the purchaser will incur the freight charges |
| goods available for sale | A calculated amount corresponding to the beginning inventory plus net purchases; represents the total pool of inventory available during a period from which sales can occur |
| gross method | A method of recording purchases of inventory at invoice price |
| gross profit | A calculated amount corresponding to net sales minus cost of goods sold |
| inventory | Goods held for resale to others |
| invoice price | List price less any trade discounts |
| list price | An establish price determined by reference to a catalog or general price list; before any discounts |
| multiple-step income statement | A complex income statement with sections that segregate cost of goods sold calculations and other components of income and expense; enables enhanced evaluations of data |
| net method | A method of recording purchases of inventory at invoice price less available cash discounts |
| operating expenses | General expense category for selling and administrative costs |
| periodic inventory system | An inventory system that utilizes a Purchases account and does not update inventory with each sale; inventory is updated by physical count at the end of accounting periods |
| perpetual inventory system | A "real-time" inventory system that updates inventory records with each purchase and sale |
| purchases discounts | A cash discount available on purchases of merchandise on account; encourages prompt payment |
| sales discounts | A cash discount offered to customers to encourage prompt payment of invoices |
| single-step income statement | A simple income statement with a section for all revenues and another for all expenses; there is no direct association between specific revenue and expense components |
| trade discount | A reduction from list price that is not entered in the accounting records; customarily offered in "setting" the invoice amount |