Question

1. Describe the difference between a service and merchandising firm. Give an example of each from publicly traded companies.
2. Give a detailed example of the recording of purchases under a perpetual inventory system including returns, allowances and discounts.
3. Give a detailed example of the recording sales revenues under a perpetual inventory system including returns, allowances and discounts.
4. Give a detailed example of the recording of purchases under a periodic inventory system including returns, allowances and discounts.
5. Give a detailed example of the recording sales revenues under a periodic inventory system including returns, allowances and discounts.
6. What are the differences between a single-step and a multiple-step income statement?
7. Give an example of how to calculate cost of goods sold under a periodic inventory system. Show all relevant accounts.
8. Explain how the gross profit rate and the profit margin are computed.

Answer 1

Answer:-

1.Difference between a service and merchandising firm:-

a.Meaning:-Merchandising firms deals in buying and selling of goods or products.Service firms deals in selling of services.

b.Costs Incurred:-Merchandise firms may have costs like inventory,retail sales staff,etc.Service firms have costs like billing,collection,professional staff,etc.

c.Income Statements:-Merchandise firms will have "Cost of goods sold" as a line item in their income statement while service firms will not.

d.Examples:-Home Depot,Walmart,etc are examples of merchandising firms.Banks like JP Morgan,Wells Fargo,etc are examples of service firms.

2.Under perpetual inventory system purchases are recorded by debiting Inventory A/c and crediting Accounts Payable A/c(assumed purchases are on credit).Discounts are recorded as Accounts Payable A/c debit and Inventory A/c credit as it will reduce the inventory directly.Purchase return will be recorded as Accounts Payable A/c or Accounts Receivable debit and Inventory A/c credit.Example is as below:-

Purchased 1000 units at 10$ per unit

Inventory A/c-------------------Dr 10,000

To Accounts Payable Cr 10,000

Received a discount of 1$ per unit on above

Accounts Payable A/c-------------Dr 1,000

To Inventory A/c Cr 1,000

Returned 100 units

Accounts payable A/c-------------Dr 900

To Inventory A/c Cr 900

3.Under perpetual inventory system Inventory sales will be recorded as Accounts Receivable A/c debit and Sales A/c credit.Also another entry is passed to while recording sales which is debit Cost of goods sold A/c and credit Inventory A/c.Sales returns will be recorded as Sales Return A/c debit and Accounts receivable A/c credit.Also another entry will be Inventory A/c debit to Cost of goods sold.

Sold 1000 units @ $15 per unit costing 10$ per unit

Accounts Receivable A/c-----------Dr 15,000

To Sales Cr 15,000

Cost of goods sold A/c--------------Dr 10,000

To Inventory A/c Cr 10,000

Sales return of 100 units

Sales return A/c--------------------Dr 1,500

To Accounts Receivable Cr 1,500

Inventory A/c-------------------------Dr 1,000  

To Cost of goods sold A/c 1,000

4.Under periodic inventory system purchases are recorded by debiting Purchases A/c and crediting Accounts Payable A/c(assumed purchases are on credit).Discounts are recorded as Accounts Payable A/c debit and Discount Received A/c credit.Purchase return will be recorded as Accounts Payable A/c or Accounts Receivable debit and Purchase Return A/c credit.Example is as below:-

Purchased 1000 units at 10$ per unit

Purchase A/c-------------------Dr 10,000

To Accounts Payable Cr 10,000

Received a discount of 1$ per unit on above

Accounts Payable A/c-------------Dr 1,000

To Discount Received A/c Cr 1,000

Returned 100 units

Accounts payable A/c-------------Dr 900

To Purchase Return A/c Cr 900