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inventory

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defined as the merchandise that a company holds for sale to customers.

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merchandising

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consists of buying and selling products rather than services

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inventory is an asset

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inventory is considered an asset

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COGS is an expense

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cost of goods sold is considered an expense

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the operating cycle of a merchandising company

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the operating cycle is as follows: 1. it begins when the company purchases inventory from a vendor 2. the company then sells the inventory to a customer 3. finally, the company collects cash from customers.

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vendor

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the individual or business from whom a company purchases goods.

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customer

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the individual or business the buys good from a seller

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2 main types of inventory systems

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periodic inventory system and perpetual inventory system

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periodic inventory system

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a system in which the business does not keep a continuous record of inventory on hand. at the end of the period, the business takes a physical count of on-hand inventory and uses this information to prepare the financial statements.

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perpetual inventory system

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the computerized accounting inventory system in which the business keeps a constant/running record of inventory and cost of goods sold.

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a modern perpetual inventory system records the following:

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units purchased and cost amount, units solids and sales and cost amounts, the quality of inventory on hand and its cost

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purchase discount

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a discount that businesses offer to customers as an incentive for early payment.

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3/15, NET 30 DAYS

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means that the company can deduct 3% from the total bill is the company pays within 15 days of the invoice date. otherwise the full amount-NET- is due in 30 days

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purchase return

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a situation in which businesses allow customers to return merchandise that is defective, damaged, or otherwise unsuitable

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purchase allowances

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granted to the purchaser as an incentive to keep goods that are not "as ordered"

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purchase returns and allowances

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decrease the buyers cost of the inventory

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free on board (FOB) shipping point

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means the buyer takes ownership (title) to the goods at the shipping point. the buyer pays the freight

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FOB destination

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means the buyer takes ownership (title) to the goods at the delivery destination point.

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freight in

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the transportation cost to ship goods INTO the purchasers warehouse: thus, it is freight on purchased goods

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freight out

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the transportation cost to ship good OUT of the warehouse and to the customer; this, it is freight on goods sold

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operating expenses

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expenses (other than the cost of goods sold) that occur in the entity's major line of business

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sales revenue (sales)

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the amount a business earns from selling merchandise inventory

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cost of goods sold (COGS)

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the cot of inventory that has been sold to customers. considered the business's greatest expense

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sales discount

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reduction in the amount of cash received from a customer for the early payment. offered by the seller as an incentive for the customer to pay early

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sales return and allowances

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decrease in the seller's receivable from a customer's return of merchandise or from granting the customer an allowance from the amount owed to the seller

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remember that:

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sales discount and sales return and allowances are contra accounts to sales revenue

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remember that:

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contra accounts have the opposite normal balance of its companion account

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gross profit or gross margin

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net sales minus cost of goods sold

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selling expenses

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expenses related to marketing and selling the company's products. these include sales salaries, sales commissions, advertising, depreciation, store rent, utilities on store buildings, property taxes on store buildings and delivery expense

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general expenses

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incluse expenses not related to marketing the company's products. these include office expenses, such as the salaries of the executives and office employees; depreciation; rent, other than on stores (for example, rent on the administrative office); utilities, other than on stores (for example, utilities, on the administrative office) and property taxes on the administrative office building

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operating income

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gross profits minus operating expenses

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other revenue and expense section

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last section of the income statement which reports revenues and expenses that fall outside the company's main, day-to-day, regular operations. examples: interest revenue, interest expense, and gains and losses on the sale of plant assets

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2 income statement formats

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multi-step income statement and single-step income statement

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multi-step income statement

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format that contains subtotals to highlight significant relationships. in addition to net income, it reports gross profit and operating income

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single step income statement

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format that groups all revenues together and then lists and deducts all expenses together without drawing any subtotals

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gross profit calculation

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gross profit (net sales minus COGS) / net sales revenue

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the rate of inventory turnover calculation

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cost of goods sold/ average inventory

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days in inventory calculation

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365 days/inventory turnover ratio

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