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Accounting financial
• Multi – Step Income Statement
o Gross Sales – Sales returns and Allowances = Net Sales
o Net Sales minus Cost of Goods Sold = Gross Margin/Income
o Operating Expenses = Sales Expenses + General and Admin Expenses = Total Operating
Expenses
o Gross Margin/Income – Total Operating Expenses = Income from Operations
o Non-Operating Expenses and Revenues = Interest Income – Interest Expense =
Difference
o Total Operating Expenses – Non-Operating Expenses and Revenues difference = Net
Income
• Cost of Goods Sold
o Beginning inventory
o Plus purchases, minus purchase returns and allowances = net purchases
o Plus freight in, plus goods available for sale
o Minus ending inventory = Cost of Goods Sold
• Ratios
o Profit margin (net income/revenue), current ratio (assets/liabilities), asset turnover (Net
income/avg total assets), return on equity (net income/avg. O.E.)
o Inventory turnover
▪ Cost of Goods Sold/ Average Inventory
o Day’s Inventory on hand
▪ 365/ Inventory Turnover
• Types of Inventory Systems
o Perpetual is a type of inventory system where the inventory account is constantly being
updated and the expenses are accounted for in the Cost of Goods Sold account. Popular
with expensive and low inventory count. It is bad because it takes a long time to update,
and lots of entries so it’s not good for high volume. It is good because you can know if
someone stole from your business
o Periodic is when you update inventory accounts every year or so. You don’t have an
exact account for inventory ever, unless you just finished an inventory audit. This is a
popular method for stores where there is a high amount of low costing items. This
method is bad because you don’t know when someone stole from you, and audits take
longer.
• Perpetual making a sale and receiving Cash (Change cash to acc. Receivable when applicable) :
▪ Cash
• Sales
▪ Cost of Goods Sold
• Inventory
• Periodic making a sale and receiving cash
▪ Cash
• Sales
• Perpetual making a purchase of inventory
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