Question

Define in own words please

CHAPTER 6 – Accounting for Merchandising Businesses

1. Asset turnover
2. Cost of merchandise sold – (5 points extra – if you can tell me what this is also known as) You will hear this acronym more often than Cost of merchandise sold…
3. Credit memo
4. Credit terms
5. Debit memo
6. FOB (free on Board) destination
7. FOB (free on board) shipping point
8. Gross profit
9. Operating income
10. Invoice
11. Purchases discounts
12. Purchases returns and allowances
13. Sales discounts
14. Trade discounts
15. Administrative expenses (general expenses)

Answer 1

Asset turnover

Asset turnover is an efficiency ratio which measures the number of times the assets are generating turnover in the business. Asset turnover = Sales revenue/Total assets

Cost of merchandise sold

The cost of merchandise is the cost of sales during the period. The cost can be assigned based on FIFO, LIFO, weighted average or specific identification method. Cost of merchandise sold = Opening Inventory + Net Purchases – Closing inventory

Credit Memo

A credit memo is a document given by seller to buyer for sales return and sales allowances. It reduces the balance of accounts receivable in the books of seller.

Credit terms

Credit terms are the terms offered in purchase and for which payment has to be made as specified in terms. For example: net 30 days means payment has to be made in 30 days from invoice date

Debit memo

A debit memo is a document given by buyer to seller for debiting the account. This document is similar and equivalent to credit memo from seller point of view.

FOB (Free on Board) destination

A FOB destination is a type of sale in which the ownership of goods are transferred to buyer at the destination

FOB (Free on Board) shipping point

FOB shipping is a type of sale in which the ownership of goods is transferred to the buyer at the shipping point.

Gross profit

The difference between sales and cost of goods sold is the gross profit.

Operating income

The difference between Gross profit and operating expenses such as selling and administrative expenses is the operating income

Invoice

An invoice is an official document for sale transaction. It includes details of date, items sold, the buyer details and terms of purchase

Purchase discount

A purchase discount is a discount offered by seller to buyer based on sale terms. A purchase discount reduces the net purchase cost

Purchase returns and allowances

Purchase returns are the returns made by buyer to seller for defective items and items not meeting the specifications. Purchase allowances is given for sub standard items which are sold at lower prices and seller compensates the same to buyer

Sales discount

Sales discount are offered by seller to buyer for the sales made. It is offered for early settlement of payment by buyer

Trade discount

A trade discount is offered to buyers based on purchase price. It varies from buyer to buyer and supplier offers it based on understating with buyer. It reduces the net cost of purchase

Administrative expenses

Administrative expense is the expenses incurred in running the operations of the firm. For example: office salaries, office building depreciation, office supplies, etc