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6-1
MERCHANDISING
TRANSACTIONS
CHAPTER 6CHAPTER 6
6-2
Service Organizations vs. Service Organizations vs. Merchandising CompaniesMerchandising Companies
Service organizations sell timetime to earn revenue Examples include accounting firms, law
firms, and plumbing services These have been our emphasis up to now
Service CompanyIncome Statement
For the Year Ended December 31, 1999
Service revenues 150,000$ Expenses 137,500 Net income 12,500$
Not a plumber!
6-3
Service Organizations vs. Service Organizations vs. Merchandising CompaniesMerchandising Companies
Merchandising companies sell productsproducts to earn revenue Examples include sporting goods, clothing,
and auto parts stores These will be our emphasis for the rest of
the semesterMerchandising Company
Income StatementFor the Year Ended December 31, 1999
Sales revenues 150,000$ Cost of goods sold 80,000 Gross margin 70,000 Expenses 46,500 Net income 23,500$
6-4
Seller Customer/Buyer
Transfers Products
Cashor
Promise to Pay
Merchandising CompaniesMerchandising Companies
6-5
Inventory Products held for sale Classified as asset
Sales Exchange of merchandise for an asset Classified as revenue
Cost of Goods Sold (COGS) Cost of inventory sold during the period Classified as expense
Merchandising CompaniesMerchandising Companies
6-6
CLASSIFIED INCOME STATEMENT
a/k/a
MULTIPLE STEP INCOME STATEMENT
a/k/a
“SATURDAY NIGHT” PAGE
226
Merchandising CompaniesMerchandising Companies
6-7
ROLL ‘EM !ROLL ‘EM !
Video #1(Approx. 6 min.)
Video #2(Approx. 8 min.)
6-8
Merchandising CompaniesMerchandising Companies
Manufacturer Wholesaler RetailerFinal
Customer
““Channel of Distribution”Channel of Distribution”(5 points on next test)
210
Can manufacturer sell direct to final customer? (i.e., can green box be skipped?)
6-9
Who cares?
Accounting TerminologyAccounting Terminology
Sales Invoice
vs.
Purchase InvoiceWhat’s the difference?
211
prepares?
6-10
Recording and Reporting SalesRecording and Reporting Sales
Gross salesLess: Sales discountsLess: Sales returns and allowancesNet sales
6-11
Recording Gross SalesRecording Gross Sales
On May 13, TCom sold $25,000 of merchandise for cash.
GENERAL JOURNAL Page 74Date Description PR Debit Credit
May 13 Cash 25,000
Sales 25,000
To record the sale of
merchandise for cashIf the sale had been on account, we woulddebit Accounts Receivable instead of Cash.
6-12
Two Types of DiscountsTwo Types of Discounts Trade Discounts
A percentage deduction from the list or catalog price to arrive at the gross selling (invoice) price
Know the three reasons for using (p. 213) Not recorded on either seller’s or buyer’s Not recorded on either seller’s or buyer’s
books!!books!!ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least
1,000 of their most popularproduct known as Zippy. Each Zippy has a list price of $5.25.
ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least
1,000 of their most popularproduct known as Zippy. Each Zippy has a list price of $5.25.
Quantity sold 1,000 Price per unit 5.25$ Total 5,250 Less 30% discount (1,575) Invoice price 3,675$
6-13
Two Types of DiscountsTwo Types of Discounts Cash Discounts
A deduction from the invoice price granted to induce early payment of the amount due
Two other names for cash discounts• Sales discounts• Purchase discounts
Recorded on whose books?• Both seller’s and buyer’s books
They are pervasive
6-14
Two Types of DiscountsTwo Types of Discounts Cash Discounts
A deduction from the invoice price granted to induce early payment of the amount due
Two other names for cash discounts• Sales discounts• Purchase discounts
Recorded on whose books?• Both seller’s and buyer’s books
They are pervasive
3/15,n/303/15,n/30Number of
Days Discount is Available
Number of Days
Discount is Available
Otherwise, Net (or All)
is Due
Otherwise, Net (or All)
is Due
In This Number of
Days
In This Number of
Days
Discount Percent
Discount Percent
6-15
Cash (Sales) Discount ExampleCash (Sales) Discount Example
On November 8, Borey Co. sold merchandise to West, Inc. for $6,000 on
account; credit terms 2/10, n/30.
General Journal Page 61
Date Description PR Debit Credit
Nov. 8 Accounts Receivable 6,000
Sales 6,000
To record the sale on account
6-16
Cash (Sales) Discount ExampleCash (Sales) Discount Example
On November 14, West, Inc. paid its account in full.
General Journal Page 68Date Description PR Debit Credit
Nov. 14 Cash 5,880
Sales Discount 120
Accounts Receivable 6,000
To record cash received on account
Discount = $6,000 × 2% = $120Discount = $6,000 × 2% = $120
6-17
Other Deductions from SalesOther Deductions from Sales
Sales ReturnMerchandise returned by the buyer as unsatisfactory or defective.
Sales AllowanceA deduction from the original invoice price when the customer keeps merchandise but is dissatisfied with it.
6-18
Sales Returns and AllowancesSales Returns and AllowancesExampleExample
Before making a payment to you, a customer returns $135 of goods sold on account.
General Journal Page 68Date Description PR Debit Credit
Sales Returns and Allowances 135
Accounts Receivable 135
To record return of defective item.
6-19
Partial Income StatementPartial Income Statement
Gross salesLess: Sales discountsLess: Sales returns and allowances
Net sales
Sales discounts and Salesreturns and allowances areContra Revenue accounts.
6-20
Inventory MethodsInventory Methods
Perpetual Method
Periodic Method
6-21
Perpetual MethodPerpetual Method
The inventory account is continuously up-dated as purchases and sales of
inventory occur.
6-22
Perpetual MethodPerpetual Method
The inventory account is continuously up-dated as purchases and sales of
inventory occur.
More on this method in Chapter 7.
6-23
Periodic MethodPeriodic Method
This is the method used in this chapter.
Entries are not made to the inventory account during the year.
At the end of the accounting period, a physical count of inventory is needed to update the inventory account and
calculate cost of goods sold.
What is the mechanism for updating the inventory account?
Closing entries
6-24
Closing Entries for Closing Entries for Merchandising CompanyMerchandising Company
General Journal Page 88
Date Description PR Debit Credit
Sales
Purchase Discounts
Purchase Returns and Allowances
Merchandising Inventory (ending)
Income Summary
To close accounts with credit balances and set
up proper balance in ending inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #1 232 233
6-25
Closing Entries for Closing Entries for Merchandising CompanyMerchandising Company
General Journal Page 88
Date Description PR Debit Credit
Other accounts including all expenses
Sales Discounts
Sales Returns and Allowances
Merchandising Inventory (beginning)
Income Summary
To close accounts with debit balances includingthe beginning inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #2
6-26
Cost of Goods SoldCost of Goods Sold
...is an expense representing the cost of the inventory sold during the period.
...appears on the income statement.
...must be calculated using a multiple-step process when using the periodic method.
6-27
Beginning Inventory
+ Purchases
- Purchase Discounts
- Purchase Returns and Allowances
+ Transportation-in
= Cost of Goods Available for Sale
- Ending Inventory
= Cost of Goods Sold
Calculation ofCalculation ofCost of Goods SoldCost of Goods Sold
Multiple-Step ProcessMultiple-Step Process
6-28
Cost of goods sold:
Merchandise inventory, January 1, 1999 24,000$ Purchases: 167,000$ Less: Purchase discounts 3,000$ Purchase returns and allowances 8,000 11,000 Net purchases 156,000 Add: Transportation-in 10,000 Net cost of purchases 166,000 Cost of goods available for sale 190,000 Less: Merchandise inventory, December 31, 1999 31,000 Cost of goods sold 159,000$
Calculation ofCalculation ofCost of Goods SoldCost of Goods Sold
Formal Income Statement PresentationFormal Income Statement Presentation
6-29
Purchase of MerchandisePurchase of Merchandise
One May 7, Barbee, Inc. purchased $27,000 of merchandise on account; terms 2/10, n/30.
General Journal Page 26
Date Description PR Debit Credit
May 7 Purchases 27,000
Accounts Payable 27,000
Purchase merchandise on account
6-30
Purchase of MerchandisePurchase of Merchandise
One May 16, Barbee, Inc. paid for the purchase of May 7 in full.
$27,000 × 2% = $540 discount
General Journal Page 41Date Description PR Debit Credit
May 16 Accounts Payable 27,000
Cash 26,460
Purchase Discounts 540
Payment on account
6-31
General Journal Page 41Date Description PR Debit Credit
May 16 Accounts Payable 27,000
Cash 26,460
Purchase Discounts 540
Payment on account
$27,000 × 2% = $540 discount
Purchase of MerchandisePurchase of Merchandise
One May 16, Barbee, Inc. paid for the purchase of May 7 in full.
Purchase Discounts is a
Contra PurchasesContra Purchasesaccount.
6-32
Purchase Returns and AllowancesPurchase Returns and Allowances
The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before
payment is made to the supplier.
6-33
Purchase Returns and AllowancesPurchase Returns and Allowances
The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before
payment is made to the supplier.
General Journal Page 88
Date Description PR Debit CreditMay 27 Accounts Payable 200
Purchase Returns and Allowances 200
Returned defective merchandise
6-34
Transportation CostsTransportation Costs
Transportation-InInward freight costs of acquiring
merchandise.
Transportation-In ispart of cost of goods sold!
6-35
Transportation CostsTransportation Costs
Transportation Out/Delivery ExpenseOutgoing freight costs that must be paid by
the seller.
Delivery Expense is aselling expense on the
income statement!
6-36
Transportation CostsTransportation Costs
Free on Board (FOB) Shipping Point. FOB Destination. Freight Prepaid Freight Collect
Who pays thefreight charges?
6-37
FOB PointsFOB Points
ABC Wholesalers
FOB what? (Pick one)FOB what? (Pick one)
Shipping PointShipping Point
DestinationDestination
6-38
FOB Shipping Point “Free on board” at the shipping (selling) point Title passes to buyer upon shipment Buyer owns en route and...
• Ultimately bears the cost of the freight• Assumes risk of loss in transit
FOB Destination “Free on board” at the destination point Seller owns en route and...
• Ultimately bears the cost of the freight• Assumes risk of loss in transit
FOB PointsFOB Points
6-39
Transportation Cost SummaryTransportation Cost Summary
TermsInitially
Pays
Ultimately Bears
Expense
FOB Shipping Point - Freight Collect Buyer BuyerFOB Destination - Freight Prepaid Seller SellerFOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
223
6-40
Transportation Cost SummaryTransportation Cost Summary
TermsInitially
Pays
Ultimately Bears
Expense
FOB Shipping Point - Freight Collect Buyer BuyerFOB Destination - Freight Prepaid Seller SellerFOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
6-41
Prepare the journal entries for Jackson Co. Use the periodic inventory method.
July 5, 1998 Purchased 1,000 units of inventory for $25,000 cash.
July 9, 1998 Sold 300 units of inventory to a customer on account for $35 per unit.
Periodic MethodPeriodic Method
6-42
Periodic MethodPeriodic Method
GENERAL JOURNAL Page 1Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchasesAt Cost
6-43
Periodic MethodPeriodic Method
GENERAL JOURNAL Page 1Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchases
July 9 Accounts Receivable 10,500
Sales 10,500
To record inventory sales
300 units × $35 = $10,500
At Retail
6-44
Saturday Night Page, AgainSaturday Night Page, AgainP. 226P. 226
6-45
Classified Income Statement:Classified Income Statement:RevenueRevenue
Sales 250,000$ Less: Sales Discounts 3,000$ Sales Ret. & Allow. 1,500 4,500Net Sales 245,500$
Earned from the sale of inventory
227
Alternative way to express income statement relationships?
(Hint: 8th Grade)
Net sales = Gross sales - (Sales disc.+ SR&A)
6-46
Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold
Beginning Inventory (BI) 55,000$ “Purchases” (P) 176,500
Cost of Goods Avail. for Sale (GAS) 231,500Less: Ending Inventory (EI) 64,000Cost of Goods Sold (COGS) 167,500$
Three approaches to Cost of Goods Sold:
(1) Simplified Income Statement Approach
(2) Equation Approach
COGS = BI + P - EI
6-47
Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold
Beginning Inventory 55,000$ Purchases 175,000$ Less: Purchase Discounts 6,000$
Purchase Ret. & Allow. 2,500 8,500Net Purchases 166,500$ Add: Transportation-in 10,000Net Cost of Purchases 176,500Cost of Goods Avail. for Sale 231,500$ Less: Ending Inventory 64,000Cost of Goods Sold 167,500$
(3) Formal Income Statement Approach
6-48
Classified Income Statement:Classified Income Statement:Gross MarginGross Margin
Net Sales 245,500$ Cost of Goods Sold 167,500Gross Margin 78,000$
Gross Margin = Net Sales - COGS
Gross Margin is also called Gross ProfitGross Profit
6-49
Classified Income Statement:Classified Income Statement:Types of Operating ExpensesTypes of Operating Expenses
Selling Expenses
Administrative Expenses
6-50
Gross margin 78,000$ Operating expenses:
Selling expenses:Sales salaries 26,000$ Delivery expense 3,000 Advertising expense 2,000 Rent - store building 4,000 Depreciation - store equip. 2,500 37,500
Administrative expenses:Executive salaries 29,000 Rent - office building 1,600 Insurance expense 1,500 Supplies expense 1,100 33,200
Total operating expenses 70,700 Income from operations 7,300$
Classified Income Statement:Classified Income Statement:Income from OperationsIncome from Operations
6-51
Classified Income Statement:Classified Income Statement:Types of Nonoperating ItemsTypes of Nonoperating Items
Nonoperating Revenues
Nonoperating Expenses
Income from operations 7,300$ Nonoperating revenues and expenses
Nonoperating revenues:Interest revenue 400 Rent Revenue 2,000
Nonoperating expenses:Interest expense (700) Safe deposit box rental 100
Net income 9,100$
6-52
Work Sheet and Closing EntriesWork Sheet and Closing EntriesAppx. 231
6-53
Gross Margin Gross Margin PercentagePercentage
Percentage of each sales dollar available to cover expenses and a profit
GROSS MARGIN NET SALES
GM% =
6-54
WE CAN LOOK FORWARD TO A CLOSER INSPECTION
OF INVENTORY IN CHAPTER 7!
THE ENDTHE END