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ACCT 100
Accounting for MerchandisingOperations
Chapter 5
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Objectives:
1. To distinguish a service company froma merchandising company.
2. To learn how to account for inventorypurchase and inventory sale under aperpetual inventory system.
3. To learn how to account for inventorypurchase, inventory sale under aperiodic inventory system.
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Defining Inventory
1. Assets held for resale purpose in a normalcourse of business.
2. Assets used to produce products for resalepurpose.
Examples of Inventory:
Merchandising Firms: merchandise orgoodsManufacturing Firms: raw materials
work-in-process
finished GoodsAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 3
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Service Companies
Providing services (i.e., transportationcompanies, banks, etc.)
Main Revenues: service revenues.
Income measurement:
Service Revenues- Operating Expenses
Operating Income Operating cycle: Cash Providing ServiceAccounts receivables Cash
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Merchandising Companies
Buy and sell goods (i.e., retail companiessuch as Wal-Mart, Macys, etc.).
Main revenues: Sales revenues.
Income measurement:Sales Revenues- Cost of Goods Sold (cost of total merchandise sold during the period)
Gross Profit- Operating Expenses
Operating Income Operating cycle: Cash Buy Inventory Sell
Inventory Accounts Receivable CashAccounting for Merchandise Inventory, Cost of Goods Sold and the Gross Profit 5
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Perpetual Inventory System- AnExample
On February 10, inventory Costing$1,000 was purchased on credit, terms,2/10 and n/30.
On March 2, Inventory costing $250was sold for $500 on credit.
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Accounting for Inventory Purchase APerpetual Inventory System
At Purchase:Inventory 1,000
Accounts Payable 1,000(to record goods purchased on account, terms2/10, n/30)
At Sale:Accounts Receivable 500
Sales Revenue 500(to record credit sale, terms 2/10,n/30)
Cost of Goods Sold 250Inventory 250
(to record cost of merchandise sold)Accounting for Merchandising Operations 7
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T-Accounts of Inventory and CGS
Inventory CGS
1,000 250 250
750
Accounts Rec. Sales
500 500
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Perpetual Inventory System
The inventory account is used for thepurchase and sale of inventory.
The balances of inventory is available at
all time. A physical count of inventory is needed
at the end of a period.
Any discrepancy of inventory bookbalance with physical count should beadjusted to a loss or gain account.
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Perpetual Inventory System (contd.)
The cost of goods sold (CGS) accountis used to record the CGS of a sale.
Therefore, the CGS is known at alltime.
The CGS is determined by selecting acost flow assumption (will be discussed
in Chapter 6).
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Purchase, Purchase Returns andAllowance and Purchase Discounts
On Feb. 10, $1,000 inventory was purchased on credit.$200 inv. was returned on Feb. 15. The payment wasmade on Feb, 17.
Feb. 10 Inventory 1,000
Accounts Payable 1,000(To record goods purchased, terms 2/10, n/30)
Feb. 15 Accounts Payable 200Inventory 200
(To record return of goods purchased)Feb. 17 Accounts Payable 800Cash 784Inventory 16
(To record payment with discount taken)Accounting for Merchandising Operations 11
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Purchase Discount Not Taken
March 3 Accounts Payable 800
Cash 800
(To record payment on account without discounttaken)
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Purchase of InventoryFreightCosts
Freight Terms: FOB Shipping PointBuyersare responsible for freight charges.
Feb. 10 Inventory 100
Cash 100
(To record freight charges of $100, terms FOBshipping point)
Note: If freight terms were FOB destination, theseller will be responsible for the payment of thefreights.
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Purchase Invoice/Sales Invoice (seeIllustration 5-4 of textbook for an example)
Any purchase should be supported by apurchase invoice.
Companies usually record purchases when
receiving goods from the seller. A purchaser uses the sales invoice of the
seller as its purchase invoice.
In addition to the names of the seller and thebuyer, the goods sold and the total amount,credit terms and freight terms are alsoincluded in the sales invoice.
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S l S l R t d All
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Sales, Sales Returns and Allowances,Sales Discounts
On March 2, Inventory costing $250 was sold for $500 oncredit. On March 5, $50 of inventory sold was returned:Mar. 2 A/R 500
Sales 500
(To record credit sale, terms 2/10,n/30)CGS 250Inventory 250
(To record cost of merchandise sold)
Mar. 5 Sales Return and Allowance 50A/R 50Inventory 25
CGS 25
(To record sales return) 15
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Collection of A/R and SalesDiscounts
Collection of A/R on Mar. 7:
Cash 441
Sales Discount 9A/R 450
(To record collection of A/R within discount period)
If the discount is not taken (i.e., collection afterdiscount period:
Cash 450
A/R 450Accounting for Merchandising Operations 16
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Net Sales
Net Sales = Sales Sales Returns andAllowances Sales Discount
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Sale of Inventory Freight Costs
FOB Shipping Point:Buyers are responsible for the freight.
FOB Destination:
Seller are responsible for the freight.
The seller paid $30 for the shipping:
Freight-out 30
Cash 30
(Note: Freight-out is an expense account)
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Closing Entries
Sale Revenue 500
Income Summary 500
Income Summary 314Cost of Goods Sold 225
Sales ret. and Allow. 50
Sales Discount 9Freight-out 30
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Income Statement Formats
Net sales revenue $150,000Cost of good sold (80,000)Gross margin 70,000
Operating expensesSelling, Administration and Depreciation (40,000)Income form operations 30,000Other icome (expense):
Interest revenue $2,000
Interest expense (9,000)Gain on sale of equipment 3,000 (4,000)
Income before income tax 26,000Income tax expense (10,000)
Net income $16,000
Multiple -Step Income Statement (see
illustration 5-11 of textbook for an Example) :
20
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Income Statement Formats (contd.)
Single-Step Income Statement (See Illus.5-12 oftextbook)
Revenues:Net sales $150,000
Interest revenue 2,000Gain on sale of equipment 3,000
Total revenue $155,000Expenses:
Cost of goods sold 80.000
Selling, administrative and depr. 40,000Interest expense 9,000Income tax expense 10,000
Total expenses 139,000Net Income $ 16,000
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Income Statement Formats (Contd.)
Selling expenses include: salariesexpense (sales related), advertisingexpense, freight-out.
Administrative expenses include:salaries expense (administrationrelated), utility expense, insuranceexpense.
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Periodic Inventory System (usingthe example on page 6)At Purchase:
Purchases 1,000Accounts Payable 1,000
(to record goods purchased on account, terms2/10, n/30)
At Sale:Accounts Receivable 500
Sales Revenue 500(to record credit sale, terms 2/10,n/30)
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Periodic Inv. System: Purchase, PurchaseReturns and Allowance and Purchase Discounts
On Feb. 10, $1,000 inventory was purchased on credit.$200 inv. was returned on Feb. 15. The payment was madeon Feb, 17. The buyer paid freight charge $100 on 2/10.
2/10 Purchases 1,000
Accounts Payable 1,0002/10 Freight-in 100
Cash 1002/15 A/P 200
Purchase R&A 2002/17 A/P 800
Cash 784
Purchase Discounts 16Accounting for Merchandising Operations 24
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Net Purchases of a PeriodicInventory System
Net purchases = Purchases PurchasesReturns and Allowances PurchasesReturns + Freight-in
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Periodic Inv. System: Sales, Sales Returnsand Allowances and Sales Discounts
On March 2, Inventory costing $250 was sold for $500 oncredit with terms, 2/10, n/30 and FOB destination. Shippingcost is $30. On March 5, $50 of inventory sold was returnedand the remaining bal. of A/R was collected on March 7.
3/2 A/R 500
Sales 500Freight-out 30
Cash 303/5 Sales Ret. and Allow. 50
A/R 503/7 Cash 441
Sales Discount 9
A/R 450Accounting for Merchandising Operations 26
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Comparison of Perpetual vs. PeriodicInventory System
Perpetual Inventory Sys.
Pur. Inventory 1,000
A/P 1,000
Freight Inventory 100Cash 100
Pur. R&AA/P 200
Inventory 200
Pur. Dis. A/P 800
Cash 784
Inventory 16
Periodic Inventory Sys.Purchases 1,000
A/P 1,000
Freight-in 100Cash 100
A/P 200
Pur. R&A 200
A/P 800
Cash 784
Pur. Dis. 16
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Comparison of Perpetual vs. PeriodicInventory System (Contd.)
Perpetual Inventory Sys.SalesA/R 500
Sales 500CGS 250
Inventory 250S. Ret. Sales R&A 50
A/R 50Inventory 25
CGS 25
S. Dis. Cash 441Sales Dis. 9
A/R 450
Freight Freight-out 30
Cash 30
Periodic Inventory Sys.
A/R 500
Sales 500
None
Sales R&A 50A/R 50
None
Cash 441Sales Dis. 9
A/R 450
Freight-out 30
Cash 30