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Flashcards in Powerpoint 6 Deck (14):
1

Which operating cycle is longer?

Merchansing operating cycle > Service company op. cycle

2

Under a periodic system, Cost of Goods Sold is determined at the __________________

end of the period

3

Purchases account for periodic

used rather than inventory account

normal balance = debit

4

For periodic, instead of inventory account, use:

Purchase Returns and Allowances

Purchase Discounts

Freight Costs on Purchases

5

Perepetual system Cost of Goods Sold

An entry is made to record cost of goods sold each time a sale is made

6

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

7

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

8

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%)

9

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

10

To improve profit margin ratio:

Increase Gross Profit Rate

and/or

Control Operating Expenses and Other Costs

11

High Turnover Industries and Profit Margin Ratio

Usually experience low profit margins

12

Quality of Earnings Ratio

Net Cash Provided by Operating Activities

Net Income

13

Greater than 1 Quality of Earnings Ratio

Company is using conservative accounting techniques, delay recognition of income

14

Less than 1 Quality of Earnings Ratio

Company is using more aggressive accounting techniques to accelerate income recognition