Chapter 5 - Merchandising & multi-step income statement. The main contents of this chapter include all of the following: 3 basic types of companies: service businesses, merchandiser, manufacturer; income statement: multiple step format; inventory methods;. | 1 Accrual Accounting Concepts 5 Merchandising & Multi-Step Income Statement Service Businesses Make money by providing a service Services can’t be created and stockpiled for later sale. (no MERCHANDISE INVENTORY!) Usually less working capital needed to start and operate business. Simpler accounting system 2 3 basic types of companies: SERVICE Merchandiser Make money by selling a product. Usually more working capital needed because inventory must be available for sale. Bigger risk also due to obsolescence, theft, competition on price. Inventory is manufactured by another company. Merchandiser doesn’t “add value” to product. 3 3 basic types of companies: MERCHANDISER Manufacturer Convert a raw material to a finished good. Direct labor and manufacturing processes used in conversion. 3 types of inventories: Raw materials Work in process Finished goods 4 3 basic types of companies: MANUFACTURER SERVICE Revenues - Expenses Net Income ========= MERCHANDISING Sales - Contra Sales Net Sales - Cost of Goods Sold (CGS or COGS) Gross Profit - Operating Expenses Income from operations + other revenues and gains - other expenses and losses Income before taxes - Income tax expense Net Income ================= 5 Income Statement: MULTIPLE STEP FORMAT Beginning Inventory 6 Cost of Goods Purchased Ending Inventory Cost of Goods Available for Sale Cost of Goods Sold Flow of Inventory Costs Periodic method or Perpetual method Both methods end up with same balances in inventory and CGS. GAAP allows either one 1 - PERPETUAL records CGS at the time of each sale. 2 - PERIODIC doesn’t record CGS at all! It gets calculated at the End of Period! Inventory Methods - 2 options 7 To record revenues: Sales Cash EXAMPLE : You are in USB drive business. Say sell for $3, cost is $1. Start 10 units, cost = $1 each Sell 2 units 6 6 Sell 5 units 15 15 Purchase 10 units 10 Sell 8 units 24 24 . Balances 45 35 8 Inventory C G S 1 - Use PERPUTUAL METHOD : Start 10 units, cost = $1 each 10 . | 1 Accrual Accounting Concepts 5 Merchandising & Multi-Step Income Statement Service Businesses Make money by providing a service Services can’t be created and stockpiled for later sale. (no MERCHANDISE INVENTORY!) Usually less working capital needed to start and operate business. Simpler accounting system 2 3 basic types of companies: SERVICE Merchandiser Make money by selling a product. Usually more working capital needed because inventory must be available for sale. Bigger risk also due to obsolescence, theft, competition on price. Inventory is manufactured by another company. Merchandiser doesn’t “add value” to product. 3 3 basic types of companies: MERCHANDISER Manufacturer Convert a raw material to a finished good. Direct labor and manufacturing processes used in conversion. 3 types of inventories: Raw materials Work in process Finished goods 4 3 basic types of companies: MANUFACTURER SERVICE Revenues - Expenses Net Income ========= MERCHANDISING Sales - Contra .
