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Chapter Chapter 55Accounting for Accounting for
Merchandising BusinessesMerchandising BusinessesFinancial and Managerial Accounting
8th Edition
Warren Reeve Fess
PowerPoint Presentation by Douglas CloudProfessor Emeritus of AccountingPepperdine University
Total operating expenses 105,710Income from operations $ 77,240
ContinuedContinued
Other income and expenses:Rent revenue $ 600Interest expense (2,440) (1,840)
Net income $75,400
ConcludedConcluded
Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting
Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting
Periodic Method
• A method of determining the cost of merchandise sold and the amount of merchandise on hand
• Under this method, the inventory records do not show the amount available for sale or the amount sold during the period
• Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts.
• The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records.
Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting
Periodic vs. Perpetual Methods of Periodic vs. Perpetual Methods of AccountingAccounting
Perpetual Method
Cost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise PurchasedCost of Merchandise Purchased
Purchases $521,980
Less: Purchase returns and allowances $9,100
Purchase discounts 2,525 11,625
Net purchases $510,355
Add transportation-in 17,400
Cost of merchandise purchased $527,755
Cost of Merchandise SoldCost of Merchandise SoldCost of Merchandise SoldCost of Merchandise SoldMerchandise inventory, 1/1/07 $ 59,700Purchases $521,980Less: Purchase returns and
allowances $9,100Purchase discounts 2,525 11,625
Net purchases $510,355Add transportation-in 17,400
Cost of merchandise purchased 527,755Merchandise available for sale $587,455Less merchandise inventory, 12/31/07 62,150Cost of merchandise sold $525,305
Single-Step Income Statement for a Merchandising
Business
Revenues:Net sales $708,255Rent revenue 600
Total revenues $708,855Expenses:
Cost of merchandise sold $525,305Selling expenses 70,820Administrative expenses 34,890Interest expense 2,440
Total expenses 633,455
Net income $ 75,400
NetSolutionsIncome Statement
For the Year Ended December 31, 2007
Retained Earnings Statement
Retained earnings, 1/1/07 $128800Net income for year $75,400Less dividends 18,000Increase in owner’s equity 57,400Retained earnings, 12/31/07 $186,200
NetSolutionsRetained Earnings Statement
For the Year Ended December 31, 2007
Balance Sheet
AssetsCurrent assets:
Cash $52,950Accounts receivable 91,080Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650 Total current assets $209,310
NetSolutionsBalance Sheet
December 31, 2007
ContinuedContinued
Property, plant, and equipment: Land $20,000Store equipment $27,100 Less accumulated
depreciation 5,70021,400Office equipment $15,570 Less accumulated
depreciation 4,72010,850 Total property, plant, and
On January 3, a firm sold $1,800 On January 3, a firm sold $1,800 of merchandise for cash.of merchandise for cash.
On January 3, a firm sold $1,800 On January 3, a firm sold $1,800 of merchandise for cash.of merchandise for cash.
Cash SalesCash SalesCash SalesCash Sales
Cash SalesCash SalesCash SalesCash Sales
Using a perpetual inventory, the inventory Using a perpetual inventory, the inventory cost of $1,200 must be recorded.cost of $1,200 must be recorded.
Using a perpetual inventory, the inventory Using a perpetual inventory, the inventory cost of $1,200 must be recorded.cost of $1,200 must be recorded.
6
7
89
3 Cost of Merchandise Sold 1 200 00
Merchandise Inventory 1 200 00
To record the cost ofmerchandise sold.
10
Credit card sales (MasterCard or Credit card sales (MasterCard or Visa) are recorded as cash sales.Visa) are recorded as cash sales.Credit card sales (MasterCard or Credit card sales (MasterCard or Visa) are recorded as cash sales.Visa) are recorded as cash sales.At the end of the month, $48 was At the end of the month, $48 was sent to cover this service charge.sent to cover this service charge.
At the end of the month, $48 was At the end of the month, $48 was sent to cover this service charge.sent to cover this service charge.
JOURNAL
Date DescriptionPost. Ref. Dr Cr.
1
2
34
PAGE 28
5
Cash 48 00
Jan. 31 Credit Card Expense 48 002007
Cash SalesCash SalesCash SalesCash Sales
To record service chargeson credit card sales for themonth.
Jan. 12 Accounts Receivable—Sims Co. 510 00
Invoice No. 7172.
Sales 510 00
12 Cost of Merchandise Sold 280 00 Merchandise Inventory 280 00
Cost of merchandise sold on Invoice No. 7172.
Sales on AccountSales on AccountSales on AccountSales on Account
On January 12, a firm sold Sims Company On January 12, a firm sold Sims Company merchandise on account, $510. The cost of merchandise on account, $510. The cost of
the merchandise to the seller was $280.the merchandise to the seller was $280.
On January 12, a firm sold Sims Company On January 12, a firm sold Sims Company merchandise on account, $510. The cost of merchandise on account, $510. The cost of
the merchandise to the seller was $280.the merchandise to the seller was $280.
On January 22, the firm receives $1,470 On January 22, the firm receives $1,470 from Sims Co. which is the amount due of from Sims Co. which is the amount due of
$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.
On January 22, the firm receives $1,470 On January 22, the firm receives $1,470 from Sims Co. which is the amount due of from Sims Co. which is the amount due of
$1,500 less a 2 percent discount.$1,500 less a 2 percent discount.
Jan. 22 Cash 1 470 00
Accounts Receivable—Sims Co. 1 500 00
Sales Discounts 30 00
Collection of Invoice
No. 7172, less discount.
Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances
Merchandise that is returned to the vendor is referred to as a sales return.
Merchandise that is returned to the vendor is referred to as a sales return.
If there is a defect in the product or the wrong item was shipped, the seller
may reduce the initial price at which the goods were sold. This is known as
a sales allowance.
If there is a defect in the product or the wrong item was shipped, the seller
may reduce the initial price at which the goods were sold. This is known as
a sales allowance.
Jan. 13 Sales Returns and Allowances 225 00
Credit Memo No. 32.
Accounts Receivable—Krier Co. 225 00
13 Merchandise Inventory 140 00 Cost of Merchandise Sold 140 00
Cost of merchandise returned—Credit Memo 32.
Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances
On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.
On January 13, issued Credit Memo 32 to Krier On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Company for merchandise returned to NetSolutions.
Selling price, $225; cost to NetSolutions, $140.Selling price, $225; cost to NetSolutions, $140.
Purchase Purchase TransactionsTransactions
Purchase Purchase TransactionsTransactions
Date DescriptionPost. Ref. Dr Cr.
1
2
34
5
Jan. 3 Merchandise Inventory 2 510 002007
Cash 2 510 00
Purchased inventory from
Bowen Co.
Purchase TransactionsPurchase Transactions
On January 13, Purchased merchandise On January 13, Purchased merchandise for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.On January 13, Purchased merchandise On January 13, Purchased merchandise for cash from Alden Company, $2,510.for cash from Alden Company, $2,510.
If payment is made by March 22 NetSolutions If payment is made by March 22 NetSolutions records the discount as a reduction in cost.records the discount as a reduction in cost.
If payment is made by March 22 NetSolutions If payment is made by March 22 NetSolutions records the discount as a reduction in cost.records the discount as a reduction in cost.
If NetSolutions does not pay the invoice until If NetSolutions does not pay the invoice until April 11, it would pay the full amount.April 11, it would pay the full amount.
If NetSolutions does not pay the invoice until If NetSolutions does not pay the invoice until April 11, it would pay the full amount.April 11, it would pay the full amount.
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
A purchases return involves actually returning merchandise that is damaged or does not meet the
specifications of the order.
A purchases return involves actually returning merchandise that is damaged or does not meet the
specifications of the order.
When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment,
this is a purchases allowance.
When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment,
this is a purchases allowance.
NetSolutions received the NetSolutions received the delivery from Maxim delivery from Maxim
Systems and determined that Systems and determined that $900 of the items were not $900 of the items were not the merchandise ordered. the merchandise ordered.
DebitDebit memorandummemorandum #18 is #18 is issued to Maxim Systems.issued to Maxim Systems.
NetSolutions received the NetSolutions received the delivery from Maxim delivery from Maxim
Systems and determined that Systems and determined that $900 of the items were not $900 of the items were not the merchandise ordered. the merchandise ordered.
DebitDebit memorandummemorandum #18 is #18 is issued to Maxim Systems.issued to Maxim Systems.
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
You sent me the wrong interface cards. We’ll send a debit
memorandum with the returned items.
You sent me the wrong interface cards. We’ll send a debit
memorandum with the returned items.
Mar. 7 Accounts Payable—Maxim Systems 900 00
Debit Memo No. 18
Merchandise Inventory 900 00
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,
subject to terms 2/10, n/30.
On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,
subject to terms 2/10, n/30.
May 2 Merchandise Inventory 5 000 00
Purchased merchandise.
Accounts Payable—Delta Data 5 000 00
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
On May 4, NetSolutions returns $3,000 of the merchandise.
On May 4, NetSolutions returns $3,000 of the merchandise.
May 4 Accounts Payable—Delta Data Links 3 000 00
Returned portion of
merchandise purchased.
Merchandise Inventory 3 000 00
Purchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and AllowancesPurchases Returns and Allowances
On May 12, NetSolutions pays the amount due.On May 12, NetSolutions pays the amount due.
May 12 Accounts Payable—Delta Data Links 2 000 00
Paid invoice.
Cash 1 960 00
Merchandise Inventory 40 00($5,000 ($5,000 – – $3,000) x $3,000) x
2%2%
($5,000 ($5,000 – – $3,000) x $3,000) x
2%2%
Transportation Transportation CostsCosts
FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point
Buyer pays freight costs and debits Merchandise Inventory
Fruit Express
Title passes to buyer as shipment leaves shipping point.
Title passes to buyer as shipment leaves shipping point.
June 10 Merchandise Inventory 900 00
Purchased merchandise, terms FOB shipping point.
Accounts Payable—Magna Data 900 00
10 Merchandise Inventory 50 00 Cash 50 00
Paid shipping cost on merchandise purchased.
On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.point and pays the transportation cost of $50.
On June 10, NetSolutions buys merchandise from On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping Magna Data on account, $900, terms FOB shipping
point and pays the transportation cost of $50.point and pays the transportation cost of $50.
FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point
Seller pays freight costs and debits Transportation Out
Fruit Express
On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
On June 15, NetSolutions sells merchandise to Kranz On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. Company on account, $700, terms FOB destination.
The cost of the merchandise sold is $480. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.NetSolutions pays the transportation cost of $40.
Sales TaxesSales TaxesSales TaxesSales Taxes
On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The
state has a 6% sales tax.state has a 6% sales tax.
On August 12, merchandise is sold on On August 12, merchandise is sold on account to Lemon Company, $100. The account to Lemon Company, $100. The
state has a 6% sales tax.state has a 6% sales tax.
Aug. 12 Accounts Receivable—Lemon Co. 106 00
Sales 100 00
Sales Taxes Payable 6 00Invoice No. 339
Sales TaxesSales TaxesSales TaxesSales Taxes
On September 15, the seller sends in a On September 15, the seller sends in a payment of $2,900 to the taxing unit for payment of $2,900 to the taxing unit for
the August taxes collected.the August taxes collected.
On September 15, the seller sends in a On September 15, the seller sends in a payment of $2,900 to the taxing unit for payment of $2,900 to the taxing unit for
the August taxes collected.the August taxes collected.
Sept.15 Sales Tax Payable 2 900 00
Cash 2 900 00Payment for sales taxes collected during August.
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 1. Scully Company sold merchandise on account July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. to Burton Co., $7,500, terms FOB shipping point, n/45.
The cost of the merchandise sold was $4,500. The cost of the merchandise sold was $4,500.
Scully Company (Seller)Accounts Receivable—Burton Co. 7,500
Sales 7,500
Cost of Merchandise Sold 4,500Merchandise Inventory 4,500
Burton Company (Buyer)Merchandise Inventory. 7,500
Accounts Payable—Scully Co. 7,500
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Scully Company (Seller)No entry.
Burton Company (Buyer)Merchandise Inventory 150
Cash 150
July 2. Burton Company paid transportation charges of July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.$150 on July 1 purchase from Scully Company.
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 5. Scully Company sold merchandise on account July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, to Burton Co., $5,000, terms FOB shipping point,
n/30. The cost of the merchandise sold was $3,500.n/30. The cost of the merchandise sold was $3,500.
Scully Company (Seller)Accounts Receivable—Burton Co. 5,000
Sales 5,000
Cost of Merchandise Sold 3,500Merchandise Inventory 3,500
Burton Company (Buyer)Merchandise Inventory. 5,000
Accounts Payable—Scully Co. 5,000
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 7. Scully Company paid transportation costs July 7. Scully Company paid transportation costs
of $of $250250 for delivery of merchandise sold to for delivery of merchandise sold to Burton Company on July 5.Burton Company on July 5.
Scully Company (Seller)Transportation Out 250
Cash 250
Burton Company (Buyer)No entry.
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 13. Scully Company issued Burton Company a credit July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 memorandum for $1,000 of merchandise returned from a July 5
purchase on account. The cost of the merchandise was $700.purchase on account. The cost of the merchandise was $700.
Scully Company (Seller)Sales Returns and Allowances 1,000
Accounts Receivable—Burton Co. 1,000
Merchandise Inventory 700Cost of Merchandise Sold 700
Burton Company (Buyer)Accounts Payable—Scully Co. 1,000
Merchandise Inventory 1,000
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 15. Scully Company received payment July 15. Scully Company received payment from Burton Company for purchase of July 5.from Burton Company for purchase of July 5.
Scully Company (Seller)Cash 4,000
Accounts Receivable—Burton Co. 4,000
Burton Company (Buyer)Accounts Payable—Scully Co. 4,000
Cash 4,000
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.
Continued (Seller) Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 18. Scully Company sold merchandise on account to Burton July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully
prepaid transportation costs of $500, which were added to the prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.invoice. The cost of the merchandise sold was $7,200.
Scully Company (Seller)Cost of Merchandise Sold 7,200
Merchandise Inventory 7,200
Burton Company (Buyer)Merchandise Inventory 12,500
Accounts Payable—Scully Co. 12,500
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
Illustration of Accounting for Illustration of Accounting for Merchandise TransactionsMerchandise Transactions
July 28. Scully Company received payment July 28. Scully Company received payment from Burton Company for purchase of July from Burton Company for purchase of July
18, less discount (2% x $12,000).18, less discount (2% x $12,000).
Scully Company (Seller)Cash 12,260Sales Discounts 240
Accounts Receivable—Burton Co. 12,500
Burton Company (Buyer)Accounts Payable—Scully Co. 12,500
Inventory records $63,950Inventory count 62,150Inventory shortage $ 1,800
Profitability Measures -- Effective Use of AssetsProfitability Measures -- Effective Use of Assets
Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsSears Penney
Net sales $41,366,000 $31,846,000Total assets:
Beginning of year $50,409,000 $19,742,000End of year $44,317,000 $20,908,000Average $47,363,000 $20,325,000 Ratio of net sales to assetsRatio of net sales to assets .87 to 1.87 to 1 1.57 to 11.57 to 1
Ratio Use: To assess the effectiveness in the use of assets to generate sales.
Ratio Use: To assess the effectiveness in the use of assets to generate sales.