5 Distinguish between a multiple-step and a single-step income statement.
6 Explain the computation and importance of gross profit.
CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS After studying this chapter, you should be able to:
PREVIEW OF CHAPTER 5 Accounting for Merchandising Operations Merchandising Operations Operating cycles Inventory Systems Recording Purchases of Merchandise Purchase returns and allowances Freight costs Purchase discounts
PREVIEW OF CHAPTER 5 Sales returns and allowances Sales Discounts Adjusting entries Closing entries Summary of entries Recording Sales of Merchandise Accounting for Merchandising Operations Completing the Accounting Cycle
PREVIEW OF CHAPTER 5 Accounting for Merchandising Operations Forms of Financial Statements Multiple-step income statement Single-step income statement Classified balance sheet
Expenses for a merchandising company are divided into two categories:
1) cost of goods sold and
2) operating expenses
Cost of goods sold is the total cost of merchandise sold during the period.
Operating expenses are expenses incurred in the process of earning sales revenue. Examples are sales salaries and insurance expense.
Gross profit is equal to Sales Revenue less Cost of Goods Sold.
MEASURING NET INCOME
Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income (Loss) Less Equals Less Equals ILLUSTRATION 5-1 INCOME MEASUREMENT PROCESS FOR A MERCHANDISING COMPANY
ILLUSTRATION 5-2 OPERATING CYCLES FOR A SERVICE COMPANY AND A MERCHANDISING COMPANY Service Company Merchandising Company Receive Cash Perform Services Receive Cash Buy Inventory Sell Inventory Accounts Receivable Cash Cash Accounts Receivable Merchandise Inventory
The seller’s entry to record a credit memorandum involves a debit to the Sales Returns and Allowances account and a credit to Accounts Receivable. The entry to record the cost of the returned goods involves a debit to Merchandise Inventory and a credit to Cost Goods Sold .