© The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin Accounting for Merchandising Operations Chapter 5 5.

© The McGraw-Hill Companies, Inc., 2006McGraw-Hill/Irwin

Accounting for Merchandising Operations

Chapter

55


Learning objectiveLearning objective

Describe merchandising activities and identify income components for a merchandising company.

Identify and explain the inventory asset of a merchandising company.

Prepare adjustments and close accounts for a merchandising company.

Define and prepare multiple-step and single-step income statements.



Describe merchandising activities and identify income components for a merchandising company.


Merchandising ActivitiesMerchandising Activities

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

RevenuesRevenues ExpensesExpensesMinus Net

incomeNet

incomeEquals



Merchandising companies Merchandising companies sell goodssell goods to earn revenue. to earn revenue.

Example: supermarketExample: supermarket

Merchandising companies Merchandising companies sell goodssell goods to earn revenue. to earn revenue.

Example: supermarketExample: supermarket

RevenuesRevenues ExpensesExpensesMinus Net

incomeNet

incomeEquals


Manufacturer Wholesaler Retailer Customer

Merchandising CompaniesMerchandising Companies



Reporting Income for a MerchandiserReporting Income for a Merchandiser

Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts

stores

Cost ofGoods Sold

GrossProfit

ExpensesNet

IncomeNet

SalesMinus Equals Minus Equals


Operating Cycle for a MerchandiserOperating Cycle for a MerchandiserBegins with the purchase of merchandise and ends

with the collection of cash from the sale of merchandise.

Purchases

Merchandiseinventory

Credit sales

Accountreceivable

CashcollectionPurchases

Merchandiseinventory

Cashsales

Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale



Identify and explain the inventory asset of a merchandising company.


Inventory SystemsInventory Systems

+

+

BeginninginventoryBeginninginventory

Net cost ofpurchasesNet cost ofpurchases

Merchandiseavailable for sale Merchandiseavailable for sale

Ending InventoryEnding InventoryCost of Goods

SoldCost of Goods

Sold

==


Inventory SystemsInventory Systems

Perpetual inventory system continuously updates accounting records for merchandising transactions — specifically, for those records of inventory available for sale and inventory sold.

Periodic inventory system updates the accounting records for merchandise transactions only at the end of a period.



Analyze and record transactions for merchandising purchases and sales using a perpetual system.


Accounting for Merchandise PurchasesAccounting for Merchandise Purchases

Trade discounts vs. purchase discounts Purchase returns and allowances Transportation costs


Accounting for Merchandise PurchasesAccounting for Merchandise Purchases

On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.

On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.

Jun. 20 Merchandise Inventory . . . . . . . . . 14,000 Cash . . . . . . . . . . . . . . . . 14,000

Purchase merchandise for cash


Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/05 358-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 Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount

Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount


Trade DiscountsTrade Discounts

Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.


Purchase DiscountsPurchase Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

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


2/10,n/302/10,n/30Purchase DiscountsPurchase Discounts

Discount 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



On May 7, Jason, Inc. purchased $27,000 of Merchandise Inventory on account, credit

terms are 2/10, n/30.

On May 7, Jason, Inc. purchased $27,000 of Merchandise Inventory on account, credit


May 7 Merchandise Inventory 27,000 Accounts Payable 27,000

Purchase merchandise on account



On May 15, Jason, Inc. paid the amount due on the purchase of May 7.

On May 15, Jason, Inc. paid the amount due on the purchase of May 7.

$27,000 × 2% = $540 discount



After we post these entries, the accounts involved look like this:

After we post these entries, the accounts involved look like this:

Merchandise Inventory Accounts Payable 5/7 27,000 5/7 27,0005/15 540 5/15 27,000

Bal. 26,460 Bal. 0


Failure to Pay Within the Discount PeriodFailure to Pay Within the Discount Period

If we fail to take a 2/10, n/30 discount, is it really expensive?If we fail to take a 2/10, n/30 discount, is it really expensive?

365 days ÷ 20 days × 2% = 36.5% annual rate 365 days ÷ 20 days × 2% = 36.5% annual rate

Daysin ayear

Daysin ayear

Numberof additionaldays before

payment

Numberof additionaldays before

payment

Percentpaid to keep

money

Percentpaid to keep

money


Purchase Returns and AllowancesPurchase 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.

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.



On May 9, Matrix, Inc. purchased $20,000 of Merchandise Inventory on account, credit


On May 9, Matrix, Inc. purchased $20,000 of Merchandise Inventory on account, credit


May 9 Merchandise Inventory 20,000 Accounts Payable 20,000

Purchased merchandise on account



On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.

On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.

May 10 Accounts Payable 500 Merchandise Inventory 500

Returned defective merchandise



On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.

On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.

May 18 Accounts Payable 19,500 Cash 19,110 Merchandise Inventory 390

Paid account in full


Transportation CostsTransportation Costs

FOB shipping point(buyer pays)

FOB destination(seller pays)

Merchandise

Seller Buyer


Transportation CostsTransportation Costs

On May 12, Jason, Inc. purchased $8,000 of Merchandise Inventory for cash and also paid

$100 transportation costs.

On May 12, Jason, Inc. purchased $8,000 of Merchandise Inventory for cash and also paid

$100 transportation costs.

May 12 Merchandise Inventory 8,100 Cash 8,100

Paid for merchandise and transportation


Quick Check Quick Check

On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The

shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will

be part of Buyer’s July 6 journal entry?

a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450

On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The

shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will

be part of Buyer’s July 6 journal entry?

a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450

FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with

a debit to Merchandise Inventory.


Itemized Cost of Merchandise PurchasedItemized Cost of Merchandise Purchased

Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (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 May 31, 2005Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (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 May 31, 2005


Accounting for Merchandise SalesAccounting for Merchandise Sales

Sales of merchandise Sales discounts Sales returns and allowances


Accounting for Merchandise SalesAccounting for Merchandise Sales

Sales discounts and returns and allowances are Contra Revenue accounts.Sales discounts and returns and allowances are Contra Revenue accounts.


Sales of MerchandiseSales of MerchandiseOn March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was

carried in inventory at a cost of $18,000.

On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was

carried in inventory at a cost of $18,000.

Mar. 18 Accounts Receivable 25,000 Sales 25,000

Sales of merchandise on credit

Cost of Goods Sold 18,000 Merchandise Inventory 18,000

To record cost of sales


Sales DiscountsSales Discounts

On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.

Let’s prepare the journal entries.Let’s prepare the journal entries.

On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.

Let’s prepare the journal entries.Let’s prepare the journal entries.

Jun. 8 Accounts Receivable 6,000 Sales 6,000





Sales DiscountsSales Discounts

On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.

On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.

Jun. 17 Cash 5,880 Sales Discount 120

Accounts Receivable 6,000 Received payment less discount

Contra Revenue Account


Sales Returns and AllowancesSales Returns and Allowances

On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The

credit terms were 2/10, n/30.

On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The

credit terms were 2/10, n/30.

Jun. 12 Accounts Receivable 7,500 Sales 7,500






On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is

related to the June 12 sale.

On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is

related to the June 12 sale.

Jun. 14 Sales Returns and Allowances 800 Accounts Receivable 800

Customer returned merchandise

Merchandise Inventory 470 Cost of Goods Sold 470

Returned goods placed in inventory



On June 20, Barton received the amount owed to it from the sale of June 12.

On June 20, Barton received the amount owed to it from the sale of June 12.

Jun. 20 Cash 6,566 Sales Discount 134

Accounts Receivable 6,700 Received payment less discount



Prepare adjustments and close accounts for a merchandising company.


Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for

Barton.


Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 323,800 Income summary . . . . . . 323,800

To close credit balance in temporary accounts


Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

Dec. 31 Income Summary 310,900 Sales Discounts 4,300 Sales Returns 2,000 Cost of Goods Sold 233,200 Adm. Salaries Expense 18,200 Sales Salaries Expense 29,600 Insurance Expense 1,200 Rent Expense 8,100 Supplies Expense 1,000 Advertising Expense 13,300

To close debit balances in temporary accounts


Step 3:Step 3: Close Income Summary to Owner’s CapitalStep 3:Step 3: Close Income Summary to Owner’s Capital

Dec. 31 Income Summary 12,900 Barton, Capital 12,900

To close Income Summary account


Step 4:Step 4: Close Withdrawals Account to Owner’s Capital.Step 4:Step 4: Close Withdrawals Account to Owner’s Capital.

Dec. 31 Barton, Capital 4,000 Barton, Withdrawals 4,000

To close the withdrawals account



Define and prepare multiple-step and single-step income statements.


Income Statement FormatsIncome Statement Formats

Multiple-StepMultiple-Step

Single-StepSingle-Step

Multiple-StepMultiple-Step

Single-StepSingle-Step


Multiple-Step Income StatementMultiple-Step Income Statement


Operating expensesOperating expenses

Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers.

General and administrative expenses support a company’s overall operations and include expenses related to accounting, HR management, and financial management.


Single-Step Income StatementSingle-Step Income Statement


Single-Step Income StatementSingle-Step Income Statement


Multiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statement

A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and report subtotals for various classes of items. Gross profitIncome from operationsNet income

• A single-step income statement lists revenues and expenses with very few categories.


Classified Balance SheetClassified Balance Sheet

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 27,400$

Assets Liabilities

Merchandising CompanyBalance Sheet

December 31, 2005

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 27,400$

Assets Liabilities

Merchandising CompanyBalance Sheet

December 31, 2005


Acid-Test and Gross Margin RatiosAcid-Test and Gross Margin Ratios

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

= Quick AssetsQuick Assets Current LiabilitiesCurrent Liabilities

Acid-TestAcid-TestRatioRatio

Acid-TestAcid-TestRatioRatio ==

Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current LiabilitiesCurrent Liabilities


Gross Margin RatioGross Margin Ratio

Percentage of dollar sales

available to cover expenses and

provide a profit.

GrossMarginRatio

Net Sales - Cost of Goods Sold

Net Sales

=


Homework for chapter 5Homework for chapter 5

Ex 5-1, 5-4, 5-5, 5-12 Problem 5-1A, 5-4A Due on June 19, 2006 (Monday)


End of Chapter 5End of Chapter 5

© The McGraw-Hill Companies, Inc., 2006 McGraw-Hill/Irwin Accounting for Merchandising Operations Chapter 5 5.

Documents

mcgrawhill companies

merchandising purchases

merchandising company

mcgrawhillirwin accounting

merchandising transactions

inventory asset

inventory cost of goods

sale of merchandise