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Financial Accounting:Tools for Business Decision Making, 3rd Ed.
Kimmel, Weygandt, Kieso
ELS
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Chapter 5
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Chapter 5 Merchandising Operations
After studying Chapter 5, you should be able to:
Identify the differences between a service enterprise and a merchandising company.
Explain the recording of purchases under a perpetual inventory system.
Explain the recording of sales revenues under a perpetual inventory system.
Distinguish between a single-step and a multiple-step income statement.
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Chapter 5 Merchandising Operations
After studying Chapter 5, you should be able to
Determine the cost of goods sold under a periodic system.
Explain the factors affecting the profitability.
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Merchandising companies buy and sell merchandise.
Service enterprises perform services as their primary source of revenue.
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Differences Between a Service Enterprise and a Merchandising Company
In a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales.
Unlike expenses for a service company, expenses for a merchandising company are divided into two categories: Cost of goods sold - the total cost of merchandise sold
during the period. Operating expenses - selling and administrative
expenses.
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Terms
Sales revenue or sales = sale of merchandise
Cost of goods sold = total cost of merchandise sold
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Page 202 in book
SalesRevenue
Cost ofGoods Sold
GrossProfit
OperatingExpenses
Net Income (Loss)
Less
LessEquals
Equals
How Income is Measured in a Merchandising Company
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Operating cycle of a company is...
the average time it takes to go from cash to cash in producing revenues.
TO
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Operating cycle of a merchandising company is...
ordinarily longer than than that of a service company;
purchase of merchandise and its sale lengthens the cycle.
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Receive Cash
Receive Cash
Perform Services
Buy Inventory
Sell Inventory
Service Company
Merchandising Company
Cash
Cash
AccountsReceivable
AccountsReceivable
MerchandiseInventory
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Inventory SystemsPerpetual - detailed inventory system in
which the cost of inventory is maintained and the records continuously show the inventory that should be on hand
Periodic -inventory system in which detailed records are not maintained and the cost is goods sold is determined only at end of accounting period
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Record Revenue and compute and record Cost of Goods
Compute and record Cost of
Goods Sold
Perpetual
Periodic
Perpetual
Item Sold
End of Period
Comparing Periodic and Perpetual Inventory Systems
Inventory Purchased
Record Purchase of Inventory
End of Period
No Entry
Record Purchase of Inventory Record Revenue Only
Inventory Purchased Item Sold
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Computers
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and electronic scanners
have enabled many
companies to install perpetual inventory systems
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What Is Charged to Merchandise Inventory?
All costs of getting the inventory to company and ready to sell +Freight-In +Special Permits
Only costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies
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Merchandise PurchasesOn May 4 the company bought $ 3,800 worth of merchandise from PW Audio
Supply, Inc.
Task:Record the purchase by getting information from the Purchase Invoice.The Purchase Invoice is a copy of the sales invoice.
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•1. Seller•2.Invoice Date•3.Purchaser•4.Salesperson•5.Credit terms•6.Freight terms•7.Goods sold: catalog no.,description,quantity, price per unit•8.Total invoice price
Invoice No. 731
Address 125 Main StreetAttention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,5003008Production ModelCircuits
A2547Z48
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Merchandise PurchasesOn May 4 the company bought $ 3,800 worth of merchandise from PW Audio
Supply, Inc.
GENERAL JOURNAL Debit Credit
May 4 Merchandise Inventory 3,800 Accounts Payable 3,800
To record goods purchased on account.
Accounts Payable
Merchandise Inventory
May 4 3,800
Freight-out May 4 3,800
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Purchases Returns and AllowancesOn May 8 the company returned $300 worth
of merchandise to PW Audio Supply, Inc.
GENERAL JOURNAL Debit Credit
May 8 Accounts Payable 300 Merchandise Inventory 300
To record goods returned that were purchased on account.
Accounts Payable
Merchandise Inventory
May 4 3,800
Freight-out May 4 3,800May 8 300 May 8 300
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Freight Costs - On Incoming Inventory
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Freight Costs - On Incoming InventoryOn May 6 the company paid $ 150 to have the merchandise inventory delivered to
them.
GENERAL JOURNAL Debit Credit
May 6 Merchandise Inventory 150
Cash 150
To record payment of freight.
Freight-Out
Merchandise Inventory
May 4 3,800
Cash May 6 150May 8 300
May 6 150
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Freight Costs - On Outgoing Inventory
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Freight Costs-on outgoing inventoryOn May 6 the seller company paid $ 150 to have merchandise inventory delivered to
the buyer.
GENERAL JOURNAL Debit Credit
May 6 Freight-Out 150
Cash 150
To record payment of freight on goods sold.
Freight-OutMerchandise
Inventory Cash May 6 150May 6 150
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Purchase Discounts
•Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment.
•Credit terms specify the amount of cash discounts and the time period during which they are offered.
•2/10,n/30
•1/10 EOM
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Purchases Discounts
Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period
Original Invoice $3,800
-Returns 300
Amount due before discount $3,500
2% discount 70
Net due $3,430
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Purchases DiscountsReview - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period.
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable 3,500
Cash 3,430 Merchandise Inventory 70
To record payment within discount period.
Accounts Payable
Merchandise Inventory
May 4 3,800
Cash May 4 3,800May 8 300 May 8 300
May 14 70 May 14 3,500
May 14 3430May 6 150
May 6 150
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Payment of InvoiceReview - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was NOT paid within the discount period.
GENERAL JOURNAL Debit Credit
June 3 Accounts Payable 3,500
Cash 3,500
To record payment NOT within discount period.
Accounts Payable
Merchandise Inventory
May 4 3,800
Cash May 4 3,800May 8 300 May 8 300
Jun 3 3,500 Jun 3 3,500
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Sales Invoice ...
a business document that provides written evidence of a credit sale.
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•1. Seller•2.Invoice Date•3.Purchaser•4.Salesperson•5.Credit terms•6.Freight terms•7.Goods sold: catalog no.,description,quantity, price per unit•8.Total invoice price
Invoice No. 731
Address 125 Main StreetAttention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date 5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,5003008Production ModelCircuits
A2547Z48
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Sales Revenues -Under a Perpetual System
are recorded when earned-revenue recognition principle
must be supported by a business document-written evidence
2 entries are made for each sale one to record sale one to record cost of merchandise sold
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Sales - under a perpetual systemAssume a sale of $ 3,800 ON ACCOUNT
CashAccounts
ReceivableMerchandise
Inventory
Cost of Goods Sold
Sales Returns & AllowancesSales
May 4 3,800
May 4 2,400
May 4 2,400
For merchandise having a cost of $2,400
May 4 3,800
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Sales Returns and AllowancesFlip side of purchase returns and
allowanceOn buyer’s books
GENERAL JOURNAL Debit Credit
May 8 Accounts Payable 300 Merchandise Inventory 300
To record goods returned that were purchased on account.
On seller’s books
GENERAL JOURNAL Debit Credit
May 8 Sales Returns and Allowance 300 Accounts Receivable 300
To record return of goods delivered to Sauk Stero.
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Sales - under a perpetual systemAssume a sale of $ 3,800 ON ACCOUNT
CashAccounts
ReceivableMerchandise
Inventory
Cost of Goods Sold
Sales Returns & AllowancesSales
May 4 3,800
May 4 2,400
May 4 2,400
For merchandise having a cost of $2,400
May 4 3,800
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What Is the Sales Returns and Allowances Account?
Contra Revenue Account to salesUsed to show how much came in on returns
and allowances
Excessive returns and allowances suggest:inferior merchandiseinefficiencies in filing orderserrors in billing customersmistakes in delivery or shipment of goods
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What Is the Sales Discount Account?
Contra Revenue Account to salesUsed to disclose amount of cash discounts
taken by customers
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Sales Discounts
Flip side of purchase discounts
On seller’s books
GENERAL JOURNAL Debit Credit
May 14 Cash 3,430 Sales Discounts 70
Accounts Receivable 3500
To record collection within discount period.
On buyer’s books
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70
To record payment within discount period
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Two Forms OfIncome Statements
Single-step income statementMultiple-step income statement
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Single-Step Income Statement
One step… subtract total
expenses from total revenues
Revenues $10,000Expenses 3,000Net income $ 7,000
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PW AUDIO, Inc.Single-step Income Statement
For the Year Ended December 31, 2004
Sales $460,000Interest Revenue 3,000Gain on Sale of equipment 600
Total Revenues $463,600
ExpensesCost of goods sold $316,000
Selling expenses 76,000Administrative expenses 38,000Interest expense 1,800Casualty Loss from vandalism 200Income tax expense 10,100
Total expenses 442,100Net income $ 21,500
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Sales revenuesSales $ 480,000Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000Net sales 460,000Cost of goods sold 316,000Gross profit $ 144,000Operating expenses Selling expenses:
Store salaries expense $45,000 Advertising expense 16,000 Depreciation expense 8,000 Freight-out 7,000
Total selling expenses $76,000 Administrative expenses Salaries expense $19,000
Utilities expense 17,000 Insurance Expense 2,000
Total administrative expenses 38,000 Total operating expenses 114,000 Income from operations $ 30,000
PW AUDIO SUPPLY, INC.Multi-step Income Statement For the Year Ended
December 31, 2004
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Income from operations (continued) $ 30,000 Other revenues and gains Interest revenue $ 3,000 Gain on sale of equipment 600
$ 3,600Other expenses and losses Interest expense $ 1,800 Casualty loss from vandalism 200 2,000 1,600
31,600Income before income income taxes Income tax expense 10,100Net income $21,500
PW AUDIO SUPPLY, INC.Multi-step Income Statement
For the Year Ended December 31, 2004
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Cost of Goods Sold -Periodic Method
A running account of changes in inventory is not maintained.
Separate accounts use to record freight costs, returns and discounts
Cost of goods sold and ending inventory are calculated at end of period.
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Cost of goods sold Inventory, January 1 $ 36,000
Purchases $325,000Less Purchase returns and allowances $10,400Purchase discounts 6,800 17,200
Net purchases 307,800Add: Freight-in 12,200
Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000
Cost of goods sold 316,000
PW AUDIO SUPPLY, INC.Cost of Goods Sold
For the Year Ended December 31, 2004
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Gross Profit Rate=
Gross ProfitNet Sales
Company’s gross profit expressed as a percentage
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Profit Margin Ratio
Measures the percentage of each dollar of
sales that results in net income
Profit Margin Ratio = Net IncomeNet Sales
Higher value suggests favorable return on each dollar of sales.
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C O P Y R I G H T
C o p y r i g h t © 2 0 0 4 , J o h n W i l e y & S o n s , I n c . A l l r i g h t s r e s e r v e d . R e p r o d u c t i o n o r t r a n s l a t i o n o f t h i s w o r k b e y o n d t h a t p e r m i t t e d i n S e c t i o n 1 1 7 o f t h e 1 9 7 6 U n i t e d S t a t e s C o p y r i g h t A c t w i t h o u t t h ee x p r e s s w r i t t e n p e r m i s s i o n o f t h e c o p y r i g h t o w n e r i s u n l a w f u l . R e q u e s t f o r f u r t h e r i n f o r m a t i o n s h o u l d b e a d d r e s s e d t o t h e P e r m i s s i o n s D e p a r t m e n t , J o h n W i l e y & S o n s , I n c . T h e p u r c h a s e r m a y m a k e b a c k - u p c o p i e s f o r h i s / h e r o w n u s e o n l y a n d n o t f o r d i s t r i b u t i o n o r r e s a l e . T h e P u b l i s h e r a s s u m e s n o r e s p o n s i b i l i t yf o r e r r o r s , o m i s s i o n s , o r d a m a g e s , c a u s e d b y t h e u s e o f t h e s e p r o g r a m s o r f r o m t h e u s e o f t h e i n f o r m a t i o n c o n t a i n e d h e r e i n .
