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Business Categories. Service: provides services to customers Merchandising: Retail:Buy ready made goods and sell to customers Wholesale:Buy from manufacturers and sell to retailers Manufacturing:Produces goods and sells them to wholesalers. Current Assets-Inventories. Cash. - PowerPoint PPT Presentation
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Chapter 4
Merchandise Transactions
Chapter 4 Mugan-Akman 2005 2-45
Business Categories
Service: provides services to customers
• Merchandising:– Retail:Buy ready made goods and sell to
customers– Wholesale:Buy from manufacturers and sell to
retailers
• Manufacturing:Produces goods and sells them to wholesalers
Chapter 4 Mugan-Akman 2005 3-45
Current Assets-InventoriesService Merchandising
Wholesale
Retails
Manufacturing
Supplies Supplies
Merchandise
Supplies
Merchandise
Raw Material
Work-in Process
Finished Goods
Chapter 4 Mugan-Akman 2005 4-45
Operating Cycle
CashCash
Purchase Merchandise
Inventory
Purchase Merchandise
Inventory
Sell Merchandise
Sell Merchandise
if a company has cash sales only, then
the cycle is cash-inventories-sales-cash
Chapter 4 Mugan-Akman 2005 5-45
How do we determine the Acquisition Cost of Purchased Inventory?
–Determine purchase price :•ordering goods +•receiving + •inspecting +•recording the purchase +
•Recorded when title passes to the firm.
–Adjust purchase price for:–transportation ( add)–handling (add)–customs and duties (add)–cash discounts (deduction)–returns (deduction)
–to determine the acquisition cost
Cost of inventory should include all costs incurred to acquire goods and prepare them for sale.
Chapter 4 Mugan-Akman 2005 6-45
How do we record the adjustments to purchase price?
Depends on the recording system: Perpetual or Periodic
Perpetual Inventory System:•A running record of purchases are kept through “merchandise inventory” account•Purchases entries and Adjustments are made to the merchandise inventory account•The amount of inventories at a point in time can be determined
•Cost of Goods sold is known during the period
Periodic Inventory System: •Purchases of inventory are recorded in “Purchases” account
•Adjustments are made to separate accounts“
•Amount of inventories at a point can not be determined unless a physical count is made•Cost of goods sold can be determined after physical count at the end of the period
Chapter 4 Mugan-Akman 2005 7-45
How do we determine the cost of goods that are sold -COGS?
Perpetual•Accumulated in cost of goods sold account as sales are made
•Known during the period
•Physical count made at the end – helps to determine inventory shrinkage
Periodic•Cost of goods sold can be determined after the physical count •Beginning Inventory (from previous period) +•Purchases (net) –•Ending Inventory (physical count) =•Cost of goods sold•Cannot determine inventory shrinkage
Chapter 4 Mugan-Akman 2005 8-45
Merchandising Terms and Concepts
• F.O.B. shipping point (free-on-board-shipping point): the ownership of the goods is transferred to the buyer when the goods are loaded for shipment
• F.O.B. destination (free-on-board destination): in this case the ownership of goods is transferred to the buyer when the goods reach their final destination
• bulk discounts or trade discounts, • cash discounts
– For example, the terms of sales could state 2/10, n/30
Chapter 4 Mugan-Akman 2005 9-45
Accounting for Cash Discounts
Gross MethodBuyer (seller) assumes that they will not
pay within the cash discount period
Net MethodBuyer (seller) assumes that they will pay
within the discount period
Chapter 4 Mugan-Akman 2005 10-45
Accounting for Purchases-Perpetual Inventory System
Recording of purchases for cash or credit:Date Account Title and Description Debit Credit
Merchandise Inventory Accounts Payable or Cash 950Purchase of merchandise
1-Dec-04 950
If the company pays within the discount period:Date Account Title and Description Debit Credit
Accounts Payable Merchandise Inventory 19 Cash 931Payment of Accounts Payable; discount taken
9-Dec-04 950
If the company pays after the discount period:Date Account Title and Description Debit Credit
Accounts Payable Cash 950Payment of Accounts Payable; discount not taken
30-Dec-04 950
Chapter 4 Mugan-Akman 2005 11-45
Purchase Returns and Allowances
Date Account Title and Description Debit Credit
Accounts Payable or Cash Merchandise Inventory 50Return of merchandise
8-Dec-04 50
Date Account Title and Description Debit Credit
Accounts Payable or Cash Merchandise Inventory 5Received Purchase allowance
9-Dec-04 5
Chapter 4 Mugan-Akman 2005 12-45
Freight Cost - under the perpetual inventory system
Date Account Title and Description Debit Credit
Merchandise Inventory Accounts Payable 50Purchase of merchandise on credit-freight cost paid by the buyer –FOB shipping point
01.Ara.04 50
Date Account Title and Description Debit Credit
Account payable Cash 50Payment of freight charges
2-Dec-04 50
Chapter 4 Mugan-Akman 2005 13-45
Total Cost of MerchandisePurchases TL950Less: Purchase Returns and Allowances 55Less: Purchase Discounts 19Net Purchases 876Plus: Freight-in 50Total Cost of Merchandise TL 926
Purchase 950 19 Cash discountFreight in 50 50 Return
5 AllowanceBalance 926
Merchandise Inventory
Chapter 4 Mugan-Akman 2005 14-45
Selling Merchandise and Recording Cost of Goods Sold
• Sales or Sales Revenue
• cash or credit
• Sales Returns and Allowances
• Sales Discounts
Chapter 4 Mugan-Akman 2005 15-45
Accounting for Sale of Merchandise-
Perpetual Inventory System
TWO ENTRIES ARE NECESSARY TO RECORD A SALE UNDER PERPETUAL INVENTORY SYSTEM
1. To record the sale transaction
2. To reflect the cost of the sales (cost of goods sold) made and deduct the cost of sales from the inventory
Chapter 4 Mugan-Akman 2005 16-45
Recording Sales-Perpetual Giysi Giyim A.S. sold five sweaters for TL 125 on credit. The cost of
each sweater is TL 10.
Date Account Title and Description Debit Credit
Accounts Receivable Sales 125Sale of merchandise on credit
12-Dec-04 125
2) show the decrease in inventory and the corresponding increase in COGS
Date Account Title and Description Debit Credit
COGS Merchandise Inventory 50To record cost of goods sold
12-Dec-04 50
1) Record sale
Chapter 4 Mugan-Akman 2005 17-45
Accounting for Sales Returns-Perpetual System
When the customer returns one of the sweatersDate Account Title and Description Debit Credit
Sales Returns and Allowances Cash or Accounts Receivable 25Merchandise returned
15-Dec-04 25
Date Account Title and Description Debit Credit
Merchandise Inventory Cost of Goods Sold 10Returned goods to inventory
15-Dec-04 10
Chapter 4 Mugan-Akman 2005 18-45
Sales Returns and Allowances
When allowance is provided
Date Account Title and Description Debit Credit
Sales Returns and Allowances Cash or Accounts Receivable 15Merchandise returned
15.Ara.04 15
Chapter 4 Mugan-Akman 2005 19-45
Accounting for Cash Discounts –
Giysi Giyim A.S. sold TL 500 worth of merchandise to Okan Boutique with the terms 2/10, n/30.
Date Account Title and Description Debit Credit
Accounts Receivable Sales 500Sale of merchandise on credit 2/10, n/30
15-Dec-04 500
Date Account Title and Description Debit Credit
Cash 490Sales Discount 10 Accounts Receivable 500Collection on account; discount taken
24-Dec-04
How much will be collected after the discount period?
Chapter 4 Mugan-Akman 2005 20-45
Partial Income Statement
Sales TL 625Less;Sales Returns and Allowances 40Less:Sales Discounts 10Net Sales TL 575
Chapter 4 Mugan-Akman 2005 21-45
Transaction Perpetual Inventory System
Purchases Related
- Purchase of Merchandise Merchandise Inventory
- Receive Cash Discount Merchandise Inventory
- Return of merchandise and /or receipt
of price allowance
Merchandise Inventory
- Transportation Costs-if born by the
buyer
Merchandise Inventory
Sales Related
-Sale of Merchandise Sales ; COGS and Merchandise
Inventory- Grant Cash Discount Sales Discounts
- Return of merchandise by the
customer
Sales Returns and Allowances / COGS
and Merchandise Inventory- Price allowance given to the customer Sales Returns and Allowances
- Transportation Costs-if born by the Freight-out (Delivery Expense)
Chapter 4 Mugan-Akman 2005 22-45
Gross Profit
GROSS PROFIT =NET SALES – COST OF GOODS SOLD
COST OF GOODS SOLD= BEG INV + PURCHASES –END INV
GROSS PROFIT PERCENTAGE=GROSS PROFIT/NET SALES
Chapter 4 Mugan-Akman 2005 23-45
Inventory at the beginning of the year 6.700 Purchases during the year 14.800 Purchase returns and allowances 400 Purchase discounts 300 Inventory at the end of the year 4.800
Computation of COGS
Determined by a physical inventory count
Chapter 4 Mugan-Akman 2005 24-45
COGS – Periodic Computation
Beginning Inventory: TL 6.700Plus: Purchases 14.800 Less: Pur.Disc (300) Pur.R&A (400) Net Purchases 14.100 Plus: Freight-in 500 Total Cost of Purh. 14.600Cost of Goods Available for Sale 21.300Less: Ending Inventory 4.800
Cost of Goods Sold TL 16.500
Chapter 4 Mugan-Akman 2005 25-45
Single Step Income Statement
• Deduct all expenses from the total of revenues without a distinction among the different sources of revenues or the causes of expenses
Chapter 4 Mugan-Akman 2005 26-45
Giysi Giyim A.S. Income Statement
For the Year Ended 31 December 2004
Revenues
Net Sales TL 30.000
Interest Revenue 400
Gain on Sale of Equipment 200
Total Revenues 30.600Expenses
Cost of Goods Sold TL 16.500
Operating Expenses 12.600
Interest Expense 600 29.700 Income Before Tax TL 900
Chapter 4 Mugan-Akman 2005 27-45
Multiple Step Income Statement
• Discloses numerous parts or steps to determine net income, showing income from operating and non-operating activities
Chapter 4 Mugan-Akman 2005 28-45
Giysi Giyim A.Ş. Income Statement
For the Year Ended 31 December 2004Sales TL 30.700
Less: Sales Discounts TL 500 Sales Returns and Allowances 200 700
Net Sales 30.000Cost of Goods Sold:
Merchandise Inventory, 1 January 6.700Purchases TL 14.800Less: Purchase Returns and Allowances Purchase Discounts 400 700
Net Purchases 14.100Add: Freight-in 500Cost of Goods Purchased 14.600Cost of Goods Available for Sale 21.300Less: Inventory, 31 December 4.800Cost of Goods Sold 16.500Gross Profit TL 13.500Operating Expenses:Selling Expenses
Salaries Expense 6.100Advertising Expense 1.300Delivery Expense 700
Total Selling Expenses 8.100Administrative Expenses
Rent Expense 1.500Utilities Expense 1.100Depreciation Expense 1.000Insurance Expense 900
Total Administrative Expenses 4.500Total Operating Expenses TL 12.600Operating Income TL 900Other Revenues and Gains
Interest Revenue 400Gain on Sale of Equipment 200 600
Other Expenses and LossesInterest Expense (600) 0
Income Before Tax TL 900
TL 300
Chapter 4 Mugan-Akman 2005 29-45
Are we done with Inventories? NO….. Wait ‘till next chapter….