C T 2 0 1 A C C T 2 0 1 A C C T 2 0 Reporting and Analyzing Merchandising Activities UAA – ACCT 201 Principles of Financial Accounting Dr. Fred Barbee C h a p t e r 4
Jan 01, 2016
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Reporting and Analyzing Merchandising Activities
UAA – ACCT 201 Principles of Financial
Accounting Dr. Fred Barbee
Chap
ter 4
Periodic Inventory Method
Purchases
Accts. Payable
Inventory
BI xxx
xxx
xxx
Pur. R&A
xxx
Pur. Disc.
xxx
When Inventory is Purchased
The Inventory Account is not updated when inventory is
purchased.
Perpetual Inventory Method
Purchases
Accts. Pay
Pur. R&A
Pur. Disc.
Inventory
xxx
xxx
xxx
xxx
xxx
COGS
xxx
xxx
When Purchased
When Sold
Perpetual Inventory Method
Sales
Accts. Rec.
Inventory
xxx
xxx
COGS
xxx
xxx
When Sale is made
Match COGS
Sales R&A
xxx
Sales Disc.
xxx
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Additional Merchandising Issues
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Adjusting Entries
Prepaid Expenses
Depreciation
Unearned Revenue
Accrued Expenses
Accrued Revenue-
There’s more!
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Perpetual Systems – Inventory Shrinkage
Shrinkage is defined as “the loss of inventory.”
Usually charged to cost of goods sold.
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Inventory Shrinkage – Text Example
Suppose that Z-Mart’s Inventory account at year-end 2002 has a balance of $21,250, but that a physical count reveals only $21,000 of inventory on hand.
GENERAL JOURNAL Page 49Date Description PR Debit Credit
Dec 31 Cost of Goods Sold 250
Merchandise Inventory 250
To adjust for $250 inventory shrinkage
revealed by physical inventory count.
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Closing Entries
Close the Revenue Accounts
Close the Expense Accounts
Close the Income Summary
Close the Dividends Account
There’s more!
We have some new accounts
Close these with the expense accounts.
Let’s prepare theclosing entries for
Bob’s Shop for Men.
Step 1: Close the Revenue Accounts to Income Summary.
GENERAL JOURNAL Page87Date Description PR Debit Credit
Dec. 31 Sales 323,800
Income Summary 323,800
Step 2: Close the Expense Accounts to Income Summary.
GENERAL JOURNAL Page 87Date Description PR Debit Credit
Dec. 31 Income Summary 310,900
Sales Discounts 4,300
Sales Returns 2,000
Cost of Goods Sold 233,200
Adm. Salaries Exp. 18,200
Sales Salaries Exp. 29,600
Insurance Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertising Expense 13,300
Step 2: Close Debit Balances in Temporary Accounts to Income Summary.
GENERAL JOURNAL Page 87Date Description PR Debit Credit
Dec. 31 Income Summary 310,900
Sales Discounts 4,300
Sales Returns 2,000
Cost of Goods Sold 233,200
Adm. Salaries Exp. 18,200
Sales Salaries Exp. 29,600
Insurance Expense 1,200
Rent Expense 8,100
Supplies Expense 1,000
Advertising Expense 13,300
Step 3: Close Income Summary to Retained Earnings
GENERAL JOURNAL Page87Date Description PR Debit Credit
Dec. 31 Income Summary 12,900
Retained Earnings 12,900
Inventory Systems
+
+
Beginninginventory
Net cost ofpurchases
Merchandiseavailable for sale
Ending Inventory
Cost of GoodsSold
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Merchandising Cost Accounts
+
+
Beginninginventory
Year 1
Beginninginventory
Year 1
Net cost ofpurchasesNet cost ofpurchases
Merchandiseavailable for sale Merchandiseavailable for sale
Ending Inv.Year 1
Ending Inv.Year 1
Cost of GoodsSold
Cost of GoodsSold
=
Income Statemen
t
Becomes beginning inventory of Year 2Becomes beginning inventory of Year 2
BalanceSheet
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Income Statement Formats
Multiple-StepMultiple-Step
Single-StepSingle-Step
Multiple-StepMultiple-Step
Single-StepSingle-Step
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Single-Step Income Statement
Multiple-Step Income Statement
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Merchandising Cash Flows
Income Statement Statement of Cash FlowsNet Sales Receipts from CustomersCost of Goods Sold Payments to SuppliersGross Profit Net Cash Flows from Customers and Suppliers
Exhibit 4-19
Accrual-Based
Cash-Based
Acid-Test Ratio
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 Assets
Current LiabilitiesAcid-Test
Ratio
Acid-TestRatio
= Cash + S-T Investments + Receivables
Current Liabilities
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Gross Margin Ratio
Percentage of dollar sales available to
cover expenses and
provide a profit.
Gross Margin Ratio
=
Net Sales – Cost of Goods Sold
Net Sales