CHAPTER FIVE

MERCHANDISING OPERATIONS

OPERATING CYCLE OF A MERCHANDISER

TIME IT TAKES TO BUY INVENTORY AND SELL ALL OF THE GOODS. USUALLY IS THE TIME IT TAKES TO BUY INVENTORY, SELL THE GOODS ON ACCOUNT AND COLLECT THE CASH.

 

INVEN-

>>>>>>>>

>>>>>>> TORY

>>>>>>>

>>

>>

>>

>

 

>>

CASH

>>

 

>>

>>

>>

>>

>>

>>

>>

>>

>>

>><<<<<<

<   <<

ACCTS

RECVBLE

TERMINOLOGY INVENTORY – ALL

OF THE GOODS A COMPANY EXPECTS TO SELL IN THE NORMAL COURSE OF BUSINESS.

MERCHANDISING OPERATION – A COMPANY THAT SELLS GOODS.

SALES REVENUE – REVENUE FROM THE SALE OF GOODS

COST OF GOODS SOLD – THE EXPENSE OF THE GOODS THEMSELVES. PRICE THE MERCHANDISER PAID FOR THE GOODS.

INCOME STATEMENT OF A MERCHANT

XXX STOREINCOME STATEMENT

FOR THE PERIOD ENDING XX

SALES REVENUE $50,000 LESS COST OF GOODS SOLD 35,000 GROSS PROFIT (GROSS MARGIN) $15,000 LESS OPERATING EXPENSE 10,000 NET INCOME $ 5,000

TWO MAIN WAYS TO ACCOUNT FOR INVENTORY

1) PERPETUAL 2) PERIODIC

PERPETUAL INVENTORYBUSINESS KEEPS A

RUNNING RECORD OF INVENTORY AND COST OF GOODS SOLD. USED TO BE USED JUST FOR HIGH TICKET ITEMS.

PERIODIC INVENTORY

USED FOR SALES OF MANY SMALL AND INEXPENSIVE ITEMS. NO CONTINUOUS RECORD KEPT OF INVENTORY. INVENTORY COUNT DONE ONCE A MONTH, AND INVENTORY THEN ADJUSTED TO PHYSICAL COUNT.

NOW IT IS POSSIBLE FOR ANY COMPANY TO USE PERPETUAL INVENTORY.

PERPETUAL INVENTORY

ACCOUNTING FOR THE PURCHASE OF MERCHANDISE:

In perpetual inventory, the debits and credits to the inventory account are the entries to tally inventory:

1/1/03 Inventory 5,000

Accounts payable 5,000 To record purchase of inventory on account,

terms 2/10 n30.

HERE’S HOW THE INVENTORY ACCOUNT WILL LOOK:

MERCHANDISE INVENTORY

  5,000    

 

 

 

 

 

 

 

IF THE COMPANY RETURNS PART OF THE MERCHANDISE THAT IS DEFECTIVE:

1/2/03 ACCOUNTS PAYABLE 500 INVENTORY 500

TO RECORD INVENTORY RETURN

AND HERE IS THE T-ACCOUNT:

MERCHANDISE INVENTORY

  5,000    

500

 

 

 

 

 

 

COMPANY ASKS FOR ALLOWANCE ON SOME OF MERCHANDISE

AN ALLOWANCE IS LIKE A “DISCOUNT” OFF THE SALES PRICE BECAUSE SOME OF THE MERCHANDISE IS DEFECTIVE, BUT NOT SO DEFECTIVE THAT THE COMPANY CAN’T SELL IT.

TO RECORD ALLOWANCE:

1/3/03 ACCOUNTS PAYABLE 50 INVENTORY 50

TO RECORD ALLOWANCE ON MERCHANDISE

AND THE T-ACCOUNT:

MERCHANDISE INVENTORY

  5,000    

500

50

 

 

 

 

 

PURCHASE DISCOUNT

SOME COMPANIES REWARD THEIR CUSTOMERS WHO PAY EARLY BY GIVING THEM A DISCOUNT.

TYPICAL DISCOUNT TERMS LOOK LIKE THIS: “2/10, N30” WHICH MEANS “2% DISCOUNT IF PAID WITHIN 10 DAYS OF INVOICE, NET DUE IN 30 DAYS.”

IN THE CASE OF THIS EXAMPLE, THE TERMS ARE 2/10, N30.

TO RECORD THE PAYMENT OF THE DISCOUNT, FIRST SUBTRACT THE RETURN AND ALLOWANCE, AND THEN TAKE THE DISCOUNT ON THE AMOUNT OWED:

$5,000 - $500 - $50 = $4,450.2% X $4,450 = $89.

TO RECORD:

1/10/03 ACCOUNTS PAYABLE 4,450CASH 4,361INVENTORY 89

TO RECORD PAYMENT FOR 1/1 PURCHASE LESS ½ RETURN AND 1/3 ALLOWANCE.

NOTE THAT THE DISCOUNT REDUCES THE PRICE OF THE INVENTORY, SO INVENTORY IS CREDITED.

AND NOW THE T-ACCOUNT:

MERCHANDISE INVENTORY

  5,000    

500

50

89

 

 

 

 

TRANSPORTATION COST

THE COST OF TRANSPORTING GOODS MAY BE RECORDED BY THE SELLER OR THE BUYER, DEPENDING ON THE TERMS OF THE SALE.

F.O.B. – FREE ON BOARD

A. F.O.B. SHIPPER

IF TERMS OF SALE ARE F.O.B. SHIPPER, LEGAL TITLE TO THE MERCHANDISE PASSES TO THE BUYER AS SOON AS IT LEAVES THE SELLER’S PLACE OF BUSINESS. THE BUYER RECORDS THE FREIGHT AS PART OF THE COST OF MERCHANDISE. THERE MAY OR MAY NOT BE A SEPARATE FREIGHT BILL.

TO RECORD PAYMENT:

1/7/03 INVENTORY 50 CASH 50

TO RECORD PAYMENT OF FREIGHT BILL

NOTE: FREIGHT COST IS ADDED TO THE COST OF INVENTORY.

AND HERE IS THE T-ACCOUNT:

MERCHANDISE INVENTORY

  5,000    

500

50

89

50  

 

 

 

B. F.O.B. DESTINATION

IF TERMS ARE F.O.B. DESTINATION, LEGAL TITLE TO THE MERCHANDISE REMAINS WITH THE SELLER UNTIL IT REACHES THE BUYER’S BUSINESS. SELLER PAYS THE FREIGHT COST (MAY PASS THE COST ON TO THE BUYER.)

SALES OF INVENTORY

2 JOURNAL ENTRIES FOR THE SALE OF INVENTORY, ONE TO RECORD THE SALES AMOUNT AND ONE TO RECORD THE COST OF GOODS SOLD.

1/11/03 ACCOUNTS RECEIVABLE 5,000 SALES 5,000

TO RECORD SALES OF MERCHANDISE, TERMS N 3/30, N30

AND

1/11/03 COST OF GOODS SOLD 3,000INVENTORY 3,000

TO RECORD EXPENSE OF INVENTORY AND DECREASE INVENTORY

ENTRY SERVES 2 PURPOSES:

1) IT DECREASES THE INVENTORY IN STOCK TO KEEP THE RECORD OF INVENTORY ACCURATE.

2) IT RECORDS THE EXPENSE OF THE INVENTORY USED IN GENERATING THE SALE.

T-ACCOUNT:

MERCHANDISE INVENTORY

  5,000    

500

50

89

50  

3,000

 

 

SALES DISCOUNTS

THE COMPANY MAY GIVE A DISCOUNT FOR EARLY PAYMENT OF CREDIT PURCHASES (LOOK BACK AT THE SALES JOURNAL ENTRY – WHAT ARE THE TERMS?)

HERE’S HOW IT’S RECORDED:

1/15/03 CASH 4,850 SALES DISCOUNTS 150

ACCOUNTS RECEIVABLE 5,000

TO RECORD RECEIPT OF CASH FOR 1/11 SALE

LESS THE DISCOUNT

SALES DISCOUNTS DO NOT AFFECT THE INVENTORY ACCOUNT

WHY?1) INVENTORY IS GONE

2) IT IS DESIRABLE TO KEEP A SEPARATE RECORD OF SALES DISCOUNTS IN ORDER TO SEE IF THEY ACTUALLY INCREASE SALES.

SALES RETURNS AND ALLOWANCES

BUYER RETURNS SOME OF THE MERCHANDISE TO THE COMPANY (WE ARE THE SELLER, STILL.)

1/15/03 SALES RETURNS & ALLOWANCES 500 ACCOUNTS RECEIVABLE 500 USE SALES RETURNS INSTEAD OF SALES TO

KEEP A RECORD OF RETURNS/ALLOWANCES

AND, WITH RETURNS:

1/15/03 INVENTORY 300 COST OF GOODS SOLD 300

TO RECORD RETURNS OF INVENTORY.

NOTE: THERE ARE 2 JOURNAL ENTRIES IF THERE IS RETURN OF MERCHANDISE, BUT ONLY 1 JOURNAL ENTRY WITH AN ALLOWANCE. WHY?

ADJUSTING INVENTORY

EVEN WITH PERPETUAL INVENTORY, AS BUSINESS HAS TO TAKE A PHYSICAL COUNT OF INVENTORY PERIODICALLY. THERE CAN BE LOSSES DUE TO PILFERAGE, DAMAGE, MISCOUNTS ETC.

AFTER MAKING THE COUNT, ONE HAS TO MAKE AN ADJUSTMENT TO CORRECT INVENTORY TO ITS NEW BALANCE.

IF THE ADJUSTMENT IS DOWN:

1/31/03 COST OF GOODS SOLD 600 INVENTORY 600 TO ADJUST INVENTORY TO ITS PROPER

BALANCE.

INCOME STATEMENT OF A MERCHANDISER:

SALES REVENUE $200,000LESS COST OF GOODS SOLD 100,000

GROSS PROFIT $100,000LESS OPERATING EXPENSE 50,000

NET INCOME BEFORE TAX $ 50,000LESS TAXES 20,000

NET INCOME $ 30,000

COST OF GOODS SOLD AND GROSS PROFIT ARE TWO IMPORTANT ITEMS ON MERCHANDISER’S INCOME STATEMENT.

COST OF GOODS SOLD – GENERALLY THE HIGHEST SINGLE EXPENSE ON THE INCOME STATEMENT. COST OF ALL OF THE INVENTORY SOLD.

GROSS PROFIT – GROSS MARGIN – WHAT IS LEFT TO COVER ALL OTHER EXPENSES.

OPERATING EXPENSES – ALL OTHER EXPENSES INCURRED IN THE NORMAL COURSE OF BUSINESS.

OTHER REVENUES/OTHER EXPENSES – REVENUES EARNED AND EXPENSES INCURRED IN NON-OPERATIONAL ACTIVITIES. EXAMPLE: COMPANY RENTS PART OF THE WAREHOUSE TO ANOTHER COMPANY; RECORDS RENT REVENUE AS OTHER REVENUE AND ANY EXPENSES ASSOCIATED WITH THE SPACE AS OTHER EXPENSE.

MULTI-STEP INCOME STATEMENT

SHOWS SUBTOTALS TO HIGHLIGHT SIGNIFICANT RELATIONSHIPS – SEE PAGE 182.

WITH A MERCHANDISER, GROSS PROFIT IS HIGHLIGHTED; INCOME FROM OPERATIONS IS SEPARATE FROM OTHER REVENUE.

WITH A SINGLE-STEP INCOME STATEMENT, REVNUES AND EXPENSES ARE ALL TOGETHER.

BALANCE SHEET

MAIN DIFFERENCE BETWEEN MERCHANDISER AND SERVICE COMPANY IS THE INVENTORY.

RATIOS USED BY MERCHANDISERS

GROSS PROFIT PERCENTAGE = GROSS PROFIT NET SALES REVENUE

COMPANIES STRIVE TO INCREASE GROSS PROFIT AS A PROPORTION OF SALES REVENUE.

INVENTORY TURNOVER COST OF GOODS SOLD AVERAGE INVENTORY COST OF GOODS SOLD

OR (BEG. INV. +END INV)/2

SHOWS HOW MANY TIMES INVENTORY TURNS OVER IN A YEAR – HIGH TURNOVER IS BETTER.

DIFFERENT INDUSTRIES WILL DIFFERENT INVENTORY TURNOVERS. WHICH WILL SHOW HIGHER TURNOVER?

PERIODIC INVENTORY

MAIN DIFFERENCES BETWEEN PERIODIC AND PERPETUAL:

1) PERIODIC DOES NOT USE THE INVENTORY ACCOUNT TO KEEP TRACK OF INVENTORY. RATHER,IT MAKES AN ADJUSTMENT TO INVENTORY AT PERIOD END.

2) DOES NOT USE AN ACCOUNT CALLED COST OF GOODS SOLD. STILL HAS TO DERIVE COST OF GOODS SOLD, BUT DOES SO ON THE INCOME STATEMENT.

PURCHASE OF INVENTORY

1/1/03 PURCHASES 5,000ACCOUNTS PAYABLE 5,000

INSTEAD OF DEBITING AN ASSET CALLED INVENTORY, YOU DEBIT AN EXPENSE CALLED PURCHASES TO RECORD THE PURCHASE OF INVENTORY.

RETURN OF MERCHANDISE

1/2/03 ACCOUNTS PAYABLE 500PURCHASES RETURNS & 500

ALLOWANCES

USE A SEPARATE ACCOUNT TO RECORD PURCHASE RETURNS AND ALLOWANCES, UNLIKE WITH PERPETUAL.

SAME WITH AN ALLOWANCE:

1/3/03 ACCOUNTS PAYABLE 50PURCHASES RETURNS& ALLOWANCES 50

TO RECORD A DISCOUNT:

1/10/03 ACCOUNTS PAYABLE 4,450CASH

4,361PURCHASE DISCOUNTS

89

TO RECORD THE DISCOUNT, YOU DEBIT AN ACCOUNT CALLED PURCHASE DISCOUNTS.

TRANSPORTATION COST

1/7/03 FREIGHT IN 50CASH 50

AS YOU CAN SEE, THERE ARE MANY MORE ACCOUNTS WITH PERIODIC INVENTORY, AND NONE OF THE TRANSACTIONS AFFECT THE INVENTORY ACCOUNT.

TO RECORD THE SALE

1/11/03 ACCOUNTS RECEIVABLE 5,000SALES REVENUE

5,000

BUT THAT IS ALL YOU RECORD UNDER PERIODIC INVENTORY METHOD.

SALES DISCOUNT

1/15/03 CASH 4,850 SALES DISCOUNTS 150

ACCOUNTS RECEIVABLE 5,000

EXACTLY THE SAME AS PERPETUAL.

SALES RETURNS AND ALLOWANCES

1/15/03 SALES RETURNS & ALLOWANCES 500ACCOUNTS RECEIVABLE

500

WHETHER IT IS A RETURN OR AN ALLOWANCE, ONLY ONE JOURNAL ENTRY.

WHILE PERIODIC INVENTORY IS EASIER THROUGHOUT THE MONTH, IT IS MORE DIFFICULT AT THE END OF THE PERIOD.

BECAUSE THERE ARE NO ENTRIES TO INVENTORY ACCOUNT, WE HAVE TO COUNT INVENTORY TO DETERMINE ENDING INVENTORY.

TO CALCULATE COST OF GOODS SOLD, WE USE A FORMULA:

BEGINNING INVENTORY

+ NET PURCHASES +FREIGHT IN COST OF GOODS AVAILABLE FOR SALE - ENDING INVENTORY

COST OF GOODS SOLD

AND TO CALCULATE NET PURCHASES:

PURCHASES

- PURCHASE DISCOUNTS - PURCHASE RETURNS AND

ALLOWANCES NET PURCHASES

IF YOU LOOK AT THE TWO FORMULAS FOR NET PURCHASES AND FOR COST OF GOODS SOLD, YOU WILL REALIZE THAT THE SAME NUMBERS THAT WENT INTO INVENTORY UNDER THE PERPETUAL SYSTEM ARE BEING USED TO CALCULATE COST OF GOODS SOLD IN THE PERIODIC SYSTEM.