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Objectives:To distinguish a service company from a merchandising company.To learn how to account for inventory purchase and inventory sale under a perpetual inventory system.To learn how to account for inventory purchase, inventory sale under a periodic inventory system. Accounting for Merchandising operations*

Accounting for Merchandising operations

Defining Inventory1. Assets held for resale purpose in a normal course of business.2. Assets used to produce products for resale purpose.Examples of Inventory:

Merchandising Firms:merchandise or goodsManufacturing Firms:raw materialswork-in-processfinished GoodsAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*

Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit

Service CompaniesProviding services (i.e., transportation companies, banks, etc.)Main Revenues: service revenues.Income measurement: Service Revenues - Operating Expenses Operating IncomeOperating cycle: Cash Providing Service Accounts receivables CashAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Merchandising CompaniesBuy and sell goods (i.e., retail companies such as Wal-Mart, Macys, etc.).Main revenues: Sales revenues.Income measurement: Sales Revenues- Cost of Goods Sold (cost of total merchandise sold during the period) Gross Profit- Operating Expenses Operating IncomeOperating cycle: Cash Buy Inventory Sell Inventory Accounts Receivable CashAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Perpetual Inventory System- An ExampleOn February 10, inventory Costing $1,000 was purchased on credit, terms, 2/10 and n/30. On March 2, Inventory costing $250 was sold for $500 on credit.

Accounting for Merchandising Operations*

Accounting for Merchandising Operations

Accounting for Inventory Purchase A Perpetual Inventory SystemAt Purchase: Inventory 1,000 Accounts Payable 1,000(to record goods purchased on account, terms 2/10, n/30)At Sale:Accounts Receivable 500Sales Revenue 500(to record credit sale, terms 2/10,n/30)

Cost of Goods Sold 250Inventory250(to record cost of merchandise sold)



T-Accounts of Inventory and CGSInventory CGS1,000 250 250 750

Accounts Rec. Sales 500 500



Perpetual Inventory System The inventory account is used for the purchase and sale of inventory. The balances of inventory is available at all time. A physical count of inventory is needed at the end of a period. Any discrepancy of inventory book balance with physical count should be adjusted to a loss or gain account.Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Perpetual Inventory System (contd.)The cost of goods sold (CGS) account is used to record the CGS of a sale.Therefore, the CGS is known at all time.The CGS is determined by selecting a cost flow assumption (will be discussed in Chapter 6).Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Purchase, Purchase Returns and Allowance and Purchase DiscountsOn Feb. 10, $1,000 inventory was purchased on credit. $200 inv. was returned on Feb. 15. The payment was made on Feb, 17. Feb. 10 Inventory 1,000 Accounts Payable 1,000(To record goods purchased, terms 2/10, n/30) Feb. 15 Accounts Payable 200 Inventory 200(To record return of goods purchased) Feb. 17 Accounts Payable 800 Cash 784 Inventory 16 (To record payment with discount taken)



Purchase Discount Not TakenMarch 3 Accounts Payable 800 Cash 800(To record payment on account without discount taken)Accounting for Merchandising Operations*


Purchase of Inventory Freight CostsFreight Terms: FOB Shipping PointBuyers are responsible for freight charges.Feb. 10 Inventory 100 Cash 100 (To record freight charges of $100, terms FOB shipping point)Note: If freight terms were FOB destination, the seller will be responsible for the payment of the freights.Accounting for Merchandising Operations*


Purchase Invoice/Sales Invoice (see Illustration 5-4 of textbook for an example)Any purchase should be supported by a purchase invoice.Companies usually record purchases when receiving goods from the seller.A purchaser uses the sales invoice of the seller as its purchase invoice.In addition to the names of the seller and the buyer, the goods sold and the total amount, credit terms and freight terms are also included in the sales invoice.Accounting for Merchandising Operations*


Sales, Sales Returns and Allowances, Sales DiscountsOn March 2, Inventory costing $250 was sold for $500 on credit. On March 5, $50 of inventory sold was returned: Mar. 2 A/R 500 Sales 500(To record credit sale, terms 2/10,n/30) CGS 250 Inventory 250(To record cost of merchandise sold)Mar. 5 Sales Return and Allowance 50 A/R 50 Inventory 25 CGS 25 (To record sales return)

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Collection of A/R and Sales DiscountsCollection of A/R on Mar. 7: Cash 441 Sales Discount 9 A/R 450(To record collection of A/R within discount period)If the discount is not taken (i.e., collection after discount period: Cash 450 A/R 450Accounting for Merchandising Operations*


Net Sales Net Sales = Sales Sales Returns and Allowances Sales DiscountAccounting for Merchandising Operations*


Sale of Inventory Freight Costs FOB Shipping Point:Buyers are responsible for the freight.FOB Destination:Seller are responsible for the freight.The seller paid $30 for the shipping: Freight-out 30 Cash 30(Note: Freight-out is an expense account)



Closing EntriesSale Revenue 500 Income Summary 500Income Summary 314 Cost of Goods Sold 225 Sales ret. and Allow. 50 Sales Discount 9 Freight-out 30Accounting for Merchandising Operations*


Accrual Accounting and the Financial Statements*Income Statement FormatsMultiple -Step Income Statement (see illustration 5-11 of textbook for an Example) :

*

Accrual Accounting and the Financial Statements

Sheet1

Net sales revenue$150,000

Cost of good sold(80,000)

Gross margin70,000

Operating expenses

Selling, Administration and Depreciation(40,000)

Income form operations30,000

Other icome (expense):

Interest revenue$2,000

Interest expense(9,000)

Gain on sale of equipment3,000(4,000)

Income before income tax26,000

Income tax expense(10,000)

Net income$16,000

Income Statement Formats (contd.)Single-Step Income Statement (See Illus.5-12 of textbook)Revenues:Net sales $150,000Interest revenue 2,000Gain on sale of equipment 3,000 Total revenue $155,000 Expenses:Cost of goods sold 80.000Selling, administrative and depr. 40,000Interest expense 9,000Income tax expense 10,000 Total expenses 139,000Net Income $ 16,000



Income Statement Formats (Contd.)Selling expenses include: salaries expense (sales related), advertising expense, freight-out.Administrative expenses include: salaries expense (administration related), utility expense, insurance expense.



Periodic Inventory System (using the example on page 6)At Purchase: Purchases 1,000 Accounts Payable 1,000(to record goods purchased on account, terms 2/10, n/30)At Sale:Accounts Receivable 500Sales Revenue 500(to record credit sale, terms 2/10,n/30)

Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Periodic Inv. System: Purchase, Purchase Returns and Allowance and Purchase DiscountsOn Feb. 10, $1,000 inventory was purchased on credit. $200 inv. was returned on Feb. 15. The payment was made on Feb, 17. The buyer paid freight charge $100 on 2/10.2/10 Purchases 1,000 Accounts Payable 1,0002/10 Freight-in 100 Cash 1002/15 A/P 200 Purchase R&A 2002/17 A/P 800 Cash 784 Purchase Discounts 16 Accounting for Merchandising Operations*


Net Purchases of a Periodic Inventory SystemNet purchases = Purchases Purchases Returns and Allowances Purchases Returns + Freight-inAccounting for Merchandising Operations*


Periodic Inv. System: Sales, Sales Returns and Allowances and Sales DiscountsOn March 2, Inventory costing $250 was sold for $500 on credit with terms, 2/10, n/30 and FOB destination. Shipping cost is $30. On March 5, $50 of inventory sold was returned and the remaining bal. of A/R was collected on March 7. 3/2 A/R 500 Sales 500 Freight-out 30 Cash 303/5 Sales Ret. and Allow. 50 A/R 50 3/7 Cash 441 Sales Discount 9 A/R 450



Comparison of Perpetual vs. Periodic Inventory SystemPerpetual Inventory Sys. Pur. Inventory 1,000 A/P 1,000Freight Inventory 100 Cash 100Pur. R&A A/P 200 Inventory 200Pur. Dis. A/P 800 Cash 784 Inventory 16Periodic Inventory Sys.Purchases 1,000 A/P 1,000Freight-in 100 Cash 100A/P 200 Pur. R&A 200A/P 800 Cash 784 Pur. Dis. 16 Accounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit*


Comparison of Perpetual vs. Periodic Inventory System (Contd.)Perpetual Inventory Sys. Sales A/R 500 Sales 500 CGS 250 Inventory 250S. Ret. Sales R&A 50 A/R 50 Inventory 25 CGS 25S. Dis. Cash 441 Sales Dis. 9 A/R 450 Freight Freight-out 30 Cash 30 Periodic Inventory Sys.A/R 500 Sales 500NoneSales R&A 50 A/R 50None

Cash 441Sales Dis. 9 A/R 450Freight-out 30 Cash 30*


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