Powerpoint 6 Flashcards
Which operating cycle is longer?
Merchansing operating cycle > Service company op. cycle
Under a periodic system, Cost of Goods Sold is determined at the __________________
end of the period
Purchases account for periodic
used rather than inventory account
normal balance = debit
For periodic, instead of inventory account, use:
Purchase Returns and Allowances
Purchase Discounts
Freight Costs on Purchases
Perepetual system Cost of Goods Sold
An entry is made to record cost of goods sold each time a sale is made
Periodic system Cost of Goods Sold
The balance of cost of goods sold is not determined until the end of the period
Beginning inventory
+
Cost of goods purchased = Cost of Goods available for sale
-
Ending Inventory
= Cost of Goods Sold
Operating vs. Non-operating
operating income as recurring
non-operating activities as nonrecurring
*When forecasting next year's income, analysts put the most weight on this year's operating income and NOT on non-operating income
Gross Profit Rate
Gross Profit
Net Sales
Gross profit measured as a percentage of net sales (profitability)
Measures the margin by which selling price exceeds cost of goods sold
ex. 45% (selling price exceeds cost of goods sold by 45%)
Profit Margin Ratio
Net Income
Net Sales
*Measures the percentage of each dollar of sales that results in net income
*Measures the extent by which selling price covers all expenses
To improve profit margin ratio:
Increase Gross Profit Rate
and/or
Control Operating Expenses and Other Costs
High Turnover Industries and Profit Margin Ratio
Usually experience low profit margins
Quality of Earnings Ratio
Net Cash Provided by Operating Activities
Net Income
Greater than 1 Quality of Earnings Ratio
Company is using conservative accounting techniques, delay recognition of income
Less than 1 Quality of Earnings Ratio
Company is using more aggressive accounting techniques to accelerate income recognition
