Question

1). Describe the 2 formats for the income statement of a merchandising company, and list the respective sub-totals found in each income statement format. (You should describe some of the accounts found on each type of income statement). 2). a) Describe purchase discounts and purchase returns & allowances. b) Describe the 2 shipping terms methods companies use when delivering products, and how freight costs are accounted for. 3). Sales on Account - Many sales are made on account (on credit) instead of with cash or a credit card. Assume that your new company purchases products for resell to customers, and your plan is to sell those products at a profit. Make the appropriate journal entries to record the sale (on account - ie., on credit) assuming your company sells 4 of those products to a single customer. (You should select any price you wish to pay to your vendor for the purchase). Hint - There will be 2 entries...Be sure to include both the sale to the customer, as well as the impact of the reduction of inventory through cost of goods sold.

Answer 1

1.

Basically there are two are two types income statements

1. Single Step Income statement

Single Step Income statements are those which are plane statement and contains no sub totals such as gross profit, operating income, PBIT etc.

2. Multi Step income Statement

                Multi-step income statement are those where the similar expenses are grouped together and intermediate figures such as gross profit, operating income, EBIT, etc. are calculated.

Below are the some of accounts in the income statement

Revenue – Revenue generated in the merchandise operation

Cost of sales – Direct Expenses involved in the business

Gross profit – Adjusted value of Revenue after direct expenses

Selling and distribution expenses

General and administrative expenses

Other operating income and gains

Other operating expenses and losses

Operating profit/earnings before interest and taxes

Interest income

Interest expense

Profit from investments under equity method

Earnings before taxes

Net income – Net Profit after adjusting Indirect expenses, depreciation, interest and taxes

2.

Purchase discounts are discounts received from supplier for making the payments at a stipulated time period as agreed between the parties, most of the time the payment term are printed on the invoice.

Purchase Returns are those parts of purchased material returned to the supplier due to a damage claim or incorrect product

3.

Prepaid and collect are the shipping method companies normally use when delivering the product

Prepaid - Orders are paid on booking/before shipping

Collect – Order are paid on delivery or on a payment term

4.

Purchase of products from vendor

Purchases                                                          Dr                           100,000

To Cash/Vendor A/C                                                                                                      100,000

Sales

ABC Customer A/C                                          Dr                           120,000

Sales A/C                                                                                                                             120,000

On Collecting Payment

Cash/Bank          A/C                                        Dr                           120,000

To ABC Customer A/C                                                                                                    120,000