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In: Accounting

List the accounts of a merchandising company which employs a perpetual inventory system that will not...

  1. List the accounts of a merchandising company which employs a perpetual inventory system that will not appear in the financial statements of a service company. When listing the account names, indicate if it appears on the Income Statement or on the Balance Sheet..
  2. Explain what sales discounts and a purchase discounts are. What account will a buyer credit for the amount of the purchase discount.
  3. Why would a financial statement user prefer a multiple-step income statement instead of a single-step income statement.
  4. Share any struggles you had with this chapter that you would like more clarification on.

Solutions

Expert Solution

1,2.

The following accounts are exclusively used by Merchandising company:

Account Appears on
Cost of Goods Sold a/c Income Statement
Inventory a/c Balance Sheet
Sales Revenue, Sales Returns, Income Statement

3,4.

  • Sales discount is the discount offered by the company to the buyer/debtor for early payment of cash or receivables outstanding.
  • Purchase discount is the discount received from the seller of the goods by the company for early payment on purchases or account payables. The discount is credited to "Purchases discount (received) account".

5. The main reason to prefer a multiple-step income statement instead of a single-step income statement are:

  • It is possible to compute the Gross Profit, thus arrive at Gross profit margins
  • It is possible to compute Operating results ie results purely based on the actual operating activities of the company.
  • Segregation of Income in proper formatting can reveal EBIT, EBT, EAT which can be used for ratio analysis easily.

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ekkarill92 answered 1 year ago
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