ACCOUNTING 5-8
Chapter 7
Gross Profit and Gross profit margin
A-Gross profit = Net sales revenue-COGS
B- Gross profit margin = Gross profit/Net sales revenue
Net sales- Sales revenue-sales returns and allowances-sales discount
Net purchases- Purchases-Purchases returns and allowances-discount
COGS- Beginning inventory + Net purchases +Freight in – ending inventory
Inventory systems
Perpetual- Updates inventory levels after every purchase and sale. Most commonly used.
Periodic- Updates the inventory values physically counting the items on hand. Count
usually happens at end of month or year.
Definitions:
Purchase returns- Goods returned for reasons like incorrect product, over-
shipments or bad quality
Purchase allowances- When the buyer agrees to keep undesirable goods at a
reduced cost.
Purchase discounts- To encourage customers to purchase more and encourage early
payments
Freight cost- When the item is transported from the seller to the buyer(truck, train)
Safeguard- Assets must be physically protected(Cash in banks)
Merchandising business: Any business that buys and sells products for the purpose
of making a profit
FOB Freight (Free) On Board
