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Reporting and Analyzing Merchandising Activities
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
Chap
ter 4
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Service Organizations
Service organizations sell time to earn revenue.
Examples: accounting firms, law firms, and plumbing services.
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Income Statement Service Firm
Fees Earned$50,00
0Operating Expenses
36,000
Net Income$14,00
0
Service Organizations
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Merchandising Companies
Merchandising companies sell productsproducts to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
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Income Statement Merchandising Firm
Sales$150,00
0Cost of Goods Sold 90,000Gross Profit (Margin)
$60,000
Operating Expenses
35,000
Net Income $25,000
Merchandising Companies
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Manufacturer Wholesaler Retailer Customer
Merchandising Companies
Merchandising Activities
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Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200$
Equity 22,200
Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2002
Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200$
Equity 22,200
Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2002
Merchandising Companies
Classified Balance SheetAssetsCurrent assets
Cash 24,580$ Accounts receivable 98,400 Merchandise inventory 125,090 Supplies 4,700 Prepaid insurance 6,800 Total current assets 259,570$
Plant assetsLand 75,000 Building 421,500$ Less: accumulated depreciation 117,200 304,300 Equipment 114,720 Less: accumulated depreciation 41,900 72,820 Furniture and fixtures 62,800 Less: accumulated depreciation 21,000 41,800 Total plant assets 493,920
Total assets 753,490$
LiabilitiesCurrent liabilities
Accounts payable 187,600$ Wages payable 15,875 Short-term bank note 25,000 Total current liabilities 228,475$
Long-term notes payable 275,000 EquityCommon stock 200,000 Retained earnings 50,015 Total liabilities and equity 753,490$
Toys-For-Kids, Inc.Balance Sheet
December 31, 2002
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Operating Cycle
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.
Operating Cycle – Cash Sale
Inventory
Sale
Purchases
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Operating Cycle – Credit Sale
Inventory
Sale
Purchases
Collection
Accounts Receivable
Inventory Systems
+
+
Beginninginventory
Net cost ofpurchases
Merchandiseavailable for sale
Ending Inventory
Cost of GoodsSold
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Periodic Invento
ry System
s
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Periodic Inventory System
Physically count inventory, usually at end of accounting period.
No detailed records of the actual inventory are maintained during the accounting period.
Less costly than perpetual inventory method, but provides less information.
Periodic Inventory Method
Purchases
Accts. Payable
Inventory
BI xxx
xxx
xxx
Pur. R&A
xxx
Pur. Disc.
xxx
When Inventory is Purchased
The Inventory Account is not updated when inventory is
purchased.
Cost of Goods Sold $131,660
Cost of Goods Sold
Less: Ending Inventory 48,300
Goods Available for Sale 179,660
Net Purchases 126,860
Beginning Inventory $52,800
Component Amount
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Perpetual
Inventory
Systems
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Perpetual Inventory System
Continuous records are kept of the quantity and, usually, the cost of individual items as they are bought and sold.
More effective for providing information about quantities and ensuring optimal customer service.
Perpetual Inventory Method
Purchases
Accts. Pay
Pur. R&A
Pur. Disc.
Inventory
xxx
xxx
xxx
xxx
xxx
COGS
xxx
xxx
When Purchased
When Sold
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Perpetual Inventory System
In a perpetual inventory system, each purchase and sale of merchandise is recorded in an inventory account.
In this way, the inventory records always (perpetually) disclose the amount of inventory on hand the the amount sold.
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Merchandise Purchases
On June, 20, Melton Company purchased $14,000 of merchandise inventory paying cash.
GENERAL JOURNAL Page 55Date Description PR Debit Credit
Jun 20 Merchandise Inventory 14,000
Cash 14,000
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Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/02 358-BI
Sold To
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000 We appreciate your business! Ship Chg. -
Tax - Total 27,000$
Seller Seller Invoice date Invoice date PurchaserPurchaser
Order number Order number Credit termsCredit terms
Freight terms Freight terms Goods Goods Invoice amountInvoice amount
Seller Seller Invoice date Invoice date PurchaserPurchaser
Order number Order number Credit termsCredit terms
Freight terms Freight terms Goods Goods Invoice amountInvoice amount
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Trade Discounts
Used by manufacturers and Used by manufacturers and wholesalers to change selling wholesalers to change selling prices without republishing their prices without republishing their catalogs.catalogs.
ExampleJenCo, Inc. offers a 30% trade
discount on orders of 1,000units or more of their popular
product Racer. Each Racer has a list price of $5.25.
Purchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale Exhibit 4-7
2/10,n/30Discount Percent
Discount Percent
Number of Days
Discount Is Available
Number of Days
Discount Is Available
Otherwise, Net (or All)
Is Due
Otherwise, Net (or All)
Is Due CreditPeriod
CreditPeriod
Purchase Discounts
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Purchase Discounts
On May 7, Martin, Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.
GENERAL JOURNAL Page 49Date Description PR Debit Credit
May 7 Merchandise Inventory 27,000
Accounts Payable 27,000
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Purchase Discounts
On May 15, Martin, Inc. paid the amount due on the purchase of May 7.
$27,000 × 2% = $540 discount
GENERAL JOURNAL Page 55Date Description PR Debit Credit
May 15 Accounts payable 27,000
Cash 26,460
Merchandise inventory 540
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Purchase Discounts
After we post these entries, the accounts involved look like this:
Merchandise Inventory
5/7 27,000 5/15 540
Bal. 26,460
Accounts Payable 5/7 27,0005/15 27,000
Bal. 0
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Managing Discounts
If we fail to take a 2/10, n/30 discount, is it really expensive?
365 / 20 X 2% =36.5%
Days in Year
Number of additional days before payment
Percent paid to keep money
Annual Rate
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Purchase Returns and Allowances
Purchase Return . . .
Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .
A reduction in the cost of defective merchandise received by a purchaser from a supplier.
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Purchase Returns and Allowances
On May 9, Barbee, Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.
GENERAL JOURNAL Page 34Date Description PR Debit Credit
May 9 Merchandise Inventory 20,000
Accounts Payable 20,000
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Purchase Returns and Allowances
On May 10, Barbee, Inc. returned $500 of defective merchandise to the supplier.
GENERAL JOURNAL Page 37Date Description PR Debit Credit
May 10
GENERAL JOURNAL Page 37Date Description PR Debit Credit
May 10 Accounts payable 500
Merchandise Inventory 500
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Purchase Returns and Allowances
On May 18, Barbee, Inc. paid the amount owed for the May 9 purchase.
GENERAL JOURNAL Page 61Date Description PR Debit Credit
May 18
GENERAL JOURNAL Page 61Date Description PR Debit Credit
May 18 Accounts payable 19,500
Merchandise inventory 390
Cash 19,110
Transportation Costs
FOB shipping pointFOB shipping point(buyer pays)(buyer pays)
FOB destinationFOB destination(seller pays)(seller pays)Merchandise
Seller BuyerBuyer
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Transportation Costs
On May 12, Barbee, Inc. purchased $8,000 of Merchandise for cash and also paid $100 transportation costs.
GENERAL JOURNAL Page 39Date Description PR Debit Credit
May 12 Merchandise Inventory 8,100
Cash 8,100
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Recording Purchases Information
Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts received (10,388) Purchase returns and allowances (4,275) Add: Cost of transportation-in 4,895 Total cost of merchandise purchases 682,732$
Matrix, Inc.Total Cost of Merchandise Purchases
For Year Ended December 31, 2002
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Sales TransactionsOn March 18, TwoCom sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000.
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GENERAL JOURNAL Page 3Date Description PR Debit Credit
Mar. 18 Accounts Receivable 25,000
Sales 25,000
Cost of Goods Sold 18,000
Merchandise Inventory 18,000
On June 8, Borey Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30.
GENERAL JOURNAL Page 3Date Description PR Debit Credit
Jun 8 Accounts Receivable 6,000
Sales 6,000
Cost of Goods Sold 3,500
Merchandise Inventory 3,500
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Sales Discounts
On June 17, Borey Co. received a check for $5,880 in full payment of the June 8 sale.
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Sales Discounts
Sales Returns and Allowances
On June 12, Borey Co. sold merchandise costing $4,000 for $7,500 on account The credit terms were 2/10, n/30.
GENERAL JOURNAL Page 4Date Description PR Debit Credit
Jun 12 Accounts Receivable 7,500
Sales 7,500
Cost of Goods Sold 4,000
Merchandise Inventory 4,000
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On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Borey. The return is related to the June 12 sale.
GENERAL JOURNAL Page 3Date Description PR Debit Credit
Jun 14 Sales Returns and Allowances 800
Accounts Receivable 800
Merchandise Inventory 470
Cost of Goods Sold 470
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Sales Returns and Allowances
On June 20, Borey received the amount owed to it from the sale of June 12.
GENERAL JOURNAL Page 6Date Description PR Debit Credit
Jun 20 Cash 6,566
Sales Discounts 134
Account Receivable 6,700
Sales Returns and Allowances
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Recording Sales Information
Exh. 6-11
Sales discounts and returnsand allowances are
Contra Revenue accounts.
Sales discounts and returnsand allowances are
Contra Revenue accounts.