Question

In your own words.

1) Identify the differences between service and merchandising companies

2) Explain the recording of purchases under a perpetual inventory system

3) Explain the recording of sales revenues under a perpetual inventory system

4) Explain the steps in the accounting cycle for a merchandising company

5) Distinguish between a multi-step and a single-step income statement

Answer 1

Answers 1

Merchandising Businesses

A merchandise business sells merchandise. Good examples of merchandising businesses include retail clothing, grocery stores and bookstores. Many people use the term "widget" to refer to any merchandise a business offers for sale when discussing business issues and dynamics. For example, a sale in which a customer receives two widgets for the price of one may refer to any type of merchandise. It could mean two pairs of shoes for the price of one or two boxes of pasta for the price of one.

Service Businesses

A service business sells things that are not tangible. A service company does not stock inventory, but it may need to stock tools and supplies. For example, a gardener comes to mow the lawn for a fee. He is selling a service. He may need to supply his own lawnmower, which is a cost of doing business. A maid sells the service of cleaning houses, but she may or may not need to bring her own cleaning supplies. After selling a service, there is no widget to pack up.

Answers 2

"Under the perpetual inventory system, an entity continually updates its inventory records to account for additions to and subtractions from inventory for such activities as received inventory items, goods sold from stock, and items picked from inventory for use in the production process. Thus, a perpetual inventory system has the advantages of both providing up-to-date inventory balance information and requiring a reduced level of physical inventory counts. However, the calculated inventory levels derived by a perpetual inventory system may gradually diverge from actual inventory levels, due to unrecorded transactions or theft, so you should periodically compare book balances to actual on-hand quantities. "

Answers 3

Under the perpetual system, purchases, purchase returns and allowances, purchase discounts, sales, and sales returns are immediately recognized in the inventory account, so the inventory account balance should always remain accurate, assuming there is no theft, spoilage, or other losses. Consider several entries under both systems. The reference columns are removed from the illustration to simplify what you're seeing. (Note: Ap stands for accounts payable, and AR stands for accounts receivable.)

Answers 4

Service Company Accounting Cycle

A service company determines its net income by subtracting its operating expenses from its revenues. The accounting cycle for service companies starts when the customer pays for the service. However, service companies can often expect to wait several weeks or months between the time they invoice the customer and the time they receive payment.

Merchandising Company Accounting Cycle

A merchandising company determines its net income by subtracting both its operating expenses and its costs of goods sold from its revenue. While service companies can wait for months to see the revenues from their transactions, most merchandising companies realize their revenues immediately during the transaction. The transactions begin when customers pay for their items and the merchandising company delivers those items. This process enables merchandising companies to record transactions and start the accounting cycle without delay.

Answers5

Multi-Step Statement

A multi-step income statement has three parts. Sales revenue, operating expenses and non-operating revenue or expenses are the most common sections. Sales and cost of goods sold are in the first section. Selling and administrative expenses make up the second section. Non-operating activities include any non-repetitive profit activities, such as interest revenues, interest expenses and gains or losses on investment sales.

Single-Step Statement

Single-step income statements reorganize all items into revenues and expenses. No distinction is necessary between operating and non-operating activities. For example, the revenue section includes sales, interest income and gains from the sales of investments. The expense section has a similar format. Selling and administrative items, interest expense and the loss on sale of investments all fall into this section.