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Lecture Fundamental accounting principles (20/e): Chapter 5 - Wild, Shaw, Chiappetta

Chapter 5 - Accounting for merchandise operations. After completing this chapter you should be able to: Describe merchandising activities and identify income components for a merchandising company, identify and explain the inventory asset and cost flows of a merchandising company, compute the acid-test ratio and explain its use to assess liquidity,. | Chapter 5 ACCOUNTING FOR MERCHANDISE OPERATIONS Chapter 5: Accounting for Merchandise Operations INVENTORY SYSTEMS C 2 This slide illustrates the flow of costs in an inventory system. If we take what we start the period with and add the net purchases during the period, we have the total merchandise available for sale during the period. At the end of the period, one of two things must happen to the merchandise available for sale. It is either still in inventory or it is sold. If it is in inventory, the cost will appear on the balance sheet as Ending Inventory. If it is sold, the cost will appear on the income statement as Cost of Goods Sold. Learning this flow of inventory costs will help you apply new material you will learn later. Perpetual systems continually update accounting records for merchandising transactions Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period C 2 INVENTORY SYSTEMS Two alternative inventory accounting systems can be used to collect information about cost of goods sold and cost of inventory: perpetual system or periodic system. The perpetual inventory system continually updates accounting records for merchandising transactions. The periodic inventory system updates the accounting records for merchandise transactions only at the end of a period. P1 ACCOUNTING FOR MERCHANDISE PURCHASES This is an example of an invoice that would support the purchase of merchandise inventory. Notice all the different information on the invoice such as the seller, invoice date, purchaser, order date, credit terms, freight terms, goods purchased, and total invoice amount. The invoice helps provide much of the information needed when recording the entry to purchase inventory. PURCHASE DISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due. P1 Purchase discounts are provided to customers as an incentive for them to pay early. The credit period is the . | Chapter 5 ACCOUNTING FOR MERCHANDISE OPERATIONS Chapter 5: Accounting for Merchandise Operations INVENTORY SYSTEMS C 2 This slide illustrates the flow of costs in an inventory system. If we take what we start the period with and add the net purchases during the period, we have the total merchandise available for sale during the period. At the end of the period, one of two things must happen to the merchandise available for sale. It is either still in inventory or it is sold. If it is in inventory, the cost will appear on the balance sheet as Ending Inventory. If it is sold, the cost will appear on the income statement as Cost of Goods Sold. Learning this flow of inventory costs will help you apply new material you will learn later. Perpetual systems continually update accounting records for merchandising transactions Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period C 2 INVENTORY SYSTEMS Two alternative .