Ch05 Accounting for Merchandising Operations

Chapter 5-1

Chapter 5-2

Chapter 5

Accounting for Merchandising

Operations

Accounting Principles, Ninth Edition

Chapter 5-3

1. Identify the differences between service and merchandising companies.

2. Explain the recording of purchases under a perpetual inventory system.

3. Explain the recording of sales revenues under a perpetual inventory system.

4. Explain the steps in the accounting cycle for a merchandising company.

5. Distinguish between a multiple-step and a single-step income statement.

6. Explain the computation and importance of gross profit.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 5-4

Forms of Forms of Financial Financial

StatementsStatements

Forms of Forms of Financial Financial

StatementsStatements

Accounting for Merchandising Accounting for Merchandising OperationsOperations

Freight costsFreight costs

Purchase Purchase returns and returns and allowancesallowances

Purchase Purchase discountsdiscounts

Summary of Summary of purchasing purchasing transactionstransactions

MerchandisingMerchandising

OperationsOperations

MerchandisingMerchandising

OperationsOperations

Recording Recording Purchases of Purchases of MerchandiseMerchandise

Recording Recording Sales of Sales of

MerchandiseMerchandise

Recording Recording Sales of Sales of

MerchandiseMerchandise

Completing Completing the the

Accounting Accounting CycleCycle

Completing Completing the the

Accounting Accounting CycleCycle

Operating Operating cyclescycles

Flow of costsFlow of costs—perpetual —perpetual and periodic and periodic inventory inventory systemssystems

Sales returns Sales returns and and allowancesallowances

Sales Sales discountsdiscounts

Adjusting Adjusting entriesentries

Closing Closing entriesentries

Summary of Summary of merchandising merchandising entriesentries

Multiple-step Multiple-step income income statementstatement

Single-step Single-step income income statementstatement

Classified Classified balance sheetbalance sheet

Chapter 5-5

Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

SO 1 Identify the differences between service and merchandising SO 1 Identify the differences between service and merchandising companies.companies.

Merchandising Merchandising CompaniesCompanies

Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as sales revenue or sales.

Chapter 5-6

Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

Income MeasurementIncome Measurement

Illustration 5-1

Cost of goods sold is the total cost of merchandise

sold during the period.

Not used in a Service business.

Net Income (Loss)

LessEquals

Equals

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Chapter 5-7

The operating cycle of a merchandising company ordinarily is longer than that of a service company.

Operating CyclesOperating CyclesOperating CyclesOperating Cycles

Illustration 5-2

Chapter 5-8

Features:

Perpetual SystemPerpetual System

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory.

3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale.

4. Physical count done to verify Merchandise Inventory balance.

The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.

Flow of CostsFlow of CostsFlow of CostsFlow of Costs

Chapter 5-9

Features:

Periodic SystemPeriodic System

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.

3. Calculation of Cost of Goods Sold:

Flow of CostsFlow of CostsFlow of CostsFlow of Costs

Beginning inventory

$ 100,000Add: Purchases, net

800,000Goods available for sale

900,000Less: Ending inventory

125,000Cost of goods sold

$ 775,000

Chapter 5-10

Made using cash or credit (on account).

Normally recorded when goods are received.

Purchase invoice should support each credit purchase.

Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise

SO 2 Explain the recording of purchases under a perpetual inventory SO 2 Explain the recording of purchases under a perpetual inventory system.system.

Illustration 5-5

Chapter 5-11

Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell.

Illustration:Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo would make to record its purchase from PW Audio Supply.

Merchandise inventory 3,800May 4

Accounts payable 3,800

Chapter 5-12

Illustration 5-6

Seller places goods Free On Board the carrier,

and buyer pays freight costs.

Seller places goods Free On Board to the buyer’s place of business, and

seller pays freight costs.

Freight Costs – Freight Costs – Terms of Terms of SaleSale

Freight costs incurred by the seller are an operating expense.

Chapter 5-13

Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is:

Merchandise inventory 150May 6

Cash 150

Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been:

Freight-out (or Delivery Expense) 150May 6

Cash 150

Chapter 5-14

Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.

Purchase Returns and Purchase Returns and AllowancesAllowances

Return goods for credit if the sale was made on

credit, or for a cash refund if the purchase

was for cash.

May choose to keep the merchandise if the seller will grant an

allowance (deduction) from the purchase

price.

Purchase Return Purchase Allowance

Chapter 5-15

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowance

d. Merchandise Inventory

QuestionQuestion

Chapter 5-16

Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300.

Accounts payable 300May 8

Merchandise inventory 300

Chapter 5-17

Credit terms may permit buyer to claim a cash discount for prompt payment.

Advantages:

Purchaser saves money.

Seller shortens the operating cycle.

Purchase DiscountsPurchase Discounts

Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days.

Chapter 5-18

Purchase DiscountsPurchase Discounts TermsTerms

2% discount if paid within 10

days, otherwise net amount due

within 30 days.

1% discount if paid within

first 10 days of next month.

2/10, n/30 1/10 EOM

Net amount due within the first 10 days of the next

month.

n/10 EOM

Chapter 5-19

Accounts payable 3,500May 14

Cash 3,430

Merchandise Inventory 70

(Discount = $3,500 x 2% = $70)

Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment.

Chapter 5-20

Accounts payable 3,500June 3

Cash 3,500

Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:

Chapter 5-21

Should discounts be taken when offered?

Discount of 2% on $3,500 70.00$

$3,500 invested at 10% f or 20 days 19.18

Savings by taking the discount 50.82$

Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days.

Chapter 5-22

Merchandise I nventory

Debit Credit

$3,500 8th - Return$300

Balance

4th - Purchase

$3,580$3,580

70 14th - Discount

Summary of Purchasing Summary of Purchasing TransactionsTransactions

1506th – Freight-in

IllustrationIllustration

Chapter 5-23

Made for cash or credit (on account).

Normally recorded when earned, usually when goods transfer from seller to buyer.

Sales invoice should support each credit sale.

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

SO 3 Explain the recording of sales SO 3 Explain the recording of sales revenues under a perpetual revenues under a perpetual inventory system.inventory system.

Illustration 5-5

Chapter 5-24

Two Journal Entries to Record a SaleTwo Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales XXX

Cost of goods sold XXX

Merchandise inventory XXX

Selling

Chapter 5-25

Accounts receivable 3,800May 4

Sales 3,800

Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply $2,400.

Cost of goods sold 2,4004

Merchandise inventory 2,400

Chapter 5-26

“Flipside” of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns and allowances as a percentage of sales.

could distort comparisons between total sales in different accounting periods.

Sales Returns and AllowancesSales Returns and Allowances

Chapter 5-27

Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective.

Sales returns and allowances 300May 8

Accounts receivable300

Cost of goods sold140

Chapter 5-28

Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries:

Accounts receivable300

Cost of goods sold50

Chapter 5-29

The cost of goods sold is determined and recorded each time a sale occurs in:

a. periodic inventory system only.

b. a perpetual inventory system only.

c. both a periodic and perpetual inventory system.

d. neither a periodic nor perpetual inventory system.

Review QuestionReview Question

Chapter 5-30

Chapter 5-31

Offered to customers to promote prompt payment.

“Flipside” of purchase discount.

Contra-revenue account (debit).

Sales DiscountSales Discount

Chapter 5-32

Cash 3,430May 14

Accounts receivable3,500

Sales discounts 70

* [($3,800 – $300) X 2%]

Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.

Chapter 5-33

Q5-9 Joan Roland believes revenues from credit

sales may be earned before they are

collected in cash. Do you agree?

Explain.

Discussion QuestionDiscussion Question

See notes page for discussion

Chapter 5-34

Generally the same as a service company.

One additional adjustment to make the records agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Adjusting EntriesAdjusting Entries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising SO 4 Explain the steps in the accounting cycle for a merchandising company.company.

Chapter 5-35

SO 4 Explain the steps in the accounting cycle for a merchandising SO 4 Explain the steps in the accounting cycle for a merchandising company.company.

Illustration: Suppose that PW Audio Supply has an unadjusted balance of $40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is $40,000. The company would make an adjusting entry as follows.

Cost of goods sold 500

Merchandise inventory500

Chapter 5-36

Closing Entries

Chapter 5-37

Shows several steps in determining net income.

Two steps relate to principal operating activities.

Distinguishes between operating and non-operating activities.

Multiple-Step Income Multiple-Step Income StatementStatement

Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements

SO 5 Distinguish between a multiple-step and a single-step income SO 5 Distinguish between a multiple-step and a single-step income statement.statement.

Chapter 5-38 SO 6 Explain the computation and importance of gross SO 6 Explain the computation and importance of gross

profit.profit.

Illustration 5-13

Key Items:Key Items:

Net salesNet sales

Gross profitGross profit

Gross profit Gross profit raterate

Illustration 5-10

Calculation of Gross ProfitCalculation of Gross ProfitCalculation of Gross ProfitCalculation of Gross Profit

Chapter 5-39

Forms of Forms of Financial Financial StatementStatementss

Net salesNet sales

Operating Operating expensesexpenses

Illustration 5-13

MultiplMultiple-Stepe-Step

Chapter 5-40

Forms of Forms of Financial Financial StatementStatementss

Net salesNet sales

Operating Operating expensesexpenses

Nonoperating Nonoperating activitiesactivities

Net incomeNet income

Illustration 5-13

Chapter 5-41

The multiple-step income statement for a merchandiser shows each of the following features except:

a. gross profit.

b. cost of goods sold.

c. a sales revenue section.

d. investing activities section.

Review QuestionReview Question

Chapter 5-42

Subtract total expenses from total revenues

Two reasons for using the single-step format:

1) Company does not realize any type of profit until total revenues exceed total expenses.

2) Format is simpler and easier to read.

Single-Step Income StatementSingle-Step Income Statement

Chapter 5-43

Illustration 5-14

SingleSingle-Step-Step

Chapter 5-44

Illustration 5-15Classified Balance SheetClassified Balance Sheet

Chapter 5-45

Periodic System

Separate accounts used to record purchases, freight costs, returns, and discounts.

Company does not maintain a running account of changes in inventory.

Ending inventory determined by physical count.

SO 7 Explain the recording of purchases and SO 7 Explain the recording of purchases and sales of sales of inventory under a inventory under a periodic inventory system.periodic inventory system.

Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

Chapter 5-46

Calculation of Cost of Goods Calculation of Cost of Goods SoldSold

$316,000

Illustration 5A-1

Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

Chapter 5-47

Recording Purchases under Periodic Recording Purchases under Periodic SystemSystemRecording Purchases under Periodic Recording Purchases under Periodic SystemSystem

Illustration:Illustration: On the basis of the sales invoice (Illustration

5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows.

Purchases 3,800May 4

Accounts payable 3,800

Chapter 5-48

Illustration:Illustration: If Sauk pays Haul-It Freight Company $150for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is:

Freight-in (Transportation-in) 150May 6

Cash 150

Freight CostsFreight Costs

Chapter 5-49

Illustration:Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return.

Accounts payable 300May 8

Purchase returns and allowances 300

Purchase Returns and Purchase Returns and AllowancesAllowances

Chapter 5-50

Illustration:Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. SaukStereo records the payment and discount as follows.

Accounts payable 3,500May 14

Purchase discounts 70

Cash 3,430

Chapter 5-51

No entry is recorded for cost of goods sold at the time of the sale under a periodic system.

Recording Sales under Periodic Recording Sales under Periodic SystemSystemRecording Sales under Periodic Recording Sales under Periodic SystemSystem

Illustration:Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows.

Accounts receivable 3,800May 4

Sales 3,800

Chapter 5-52

Illustration:Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows.

Accounts receivable 300

Sales Returns and AllowancesSales Returns and Allowances

Chapter 5-53

Illustration:Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows.

Sales DiscountsSales Discounts

Cash 3,430May 14

Accounts receivable3,500

Sales discounts 70

Chapter 5-54

Comparison of Entries—Perpetual Vs. Comparison of Entries—Perpetual Vs. PeriodicPeriodicComparison of Entries—Perpetual Vs. Comparison of Entries—Perpetual Vs. PeriodicPeriodic

Illustration 5A-2

Chapter 5-55

Comparison of Entries—Perpetual Vs. Comparison of Entries—Perpetual Vs. PeriodicPeriodicComparison of Entries—Perpetual Vs. Comparison of Entries—Perpetual Vs. PeriodicPeriodic

Illustration 5A-2

Chapter 5-56

Worksheet for a Merchandising Worksheet for a Merchandising CompanyCompanyWorksheet for a Merchandising Worksheet for a Merchandising CompanyCompany

Illustration 5B-1

Chapter 5-57

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CopyrightCopyrightCopyrightCopyright

Ch05 Accounting for Merchandising Operations

recording of purchases

purchase of goods

perpetual inventory

merchandise inventory

purchase returnreturn

merchandising company

purchases of merchandiseunder

purchase returns

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