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Current Assets - Special Issues For Merchants P2

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Current Assets - Special Issues For Merchants P2

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The net method initially records the purchase at net price. If the discount is availed, the journal entry is to debit accounts payable for the net price and credit cash. If the buyer fails to make payment within the discount period, the journal entry is to debit accounts payable for the net price, debit purchase discounts lost for the discount which could be availed and crediting cash for the gross price.

Operating expenses are a category of expenditure that a business incurs as a result of performing its normal business operations. For example, the payment of employees' wages and funds allocated toward research and development are operating expenses.

Under the periodic inventory system, the amount appearing in the Inventory account is not updated when purchases of merchandise are made from suppliers. Rather, the Inventory account is commonly updated or adjusted only once—at the end of the year. During the year the Inventory account will likely show only the cost of inventory at the end of the previous year. Also, purchases of merchandise are recorded in one or more Purchases accounts.

Perpetual inventory system. Under this system the Inventory account is continuously updated. The Inventory account is increased with the cost of merchandise purchased from suppliers and it is reduced by the cost of merchandise that has been sold to customers.

The single-step format uses only one subtraction to arrive at net income. It is Net Income = (Revenues + Gains) – (Expenses + Losses).

The after tax profit margin ratio tells you the profit per sales dollar after all expenses are deducted from sales. In other words, the after tax profit margin ratio shows you the percentage of net sales that remains after deducting the cost of goods sold and all other expenses including income tax expense. The calculation is:

Net Income after Tax minus Net Sales.

The before tax profit margin ratio expresses the corporation’s income before income tax expense as a percentage of net sales.

The profit margin ratio is most useful when it is compared to:

1) the same company’s profit margin ratios from earlier accounting periods,
2) the same company’s targeted or planned profit margin ratio for the current accounting period,
3) the profit margin ratios of other companies in the same industry during the same accounting period.

Return to CPA Review.

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