C6 - 1 Learning Objectives 1. Nature of Merchandising Business 2. Accounting for Purchases 3. Accounting for Sales 4. Transportation Costs 5. Merchandise Transactions 6. Merchandising Chart of Accounts 7. Merchandising Income Statement 8. Merchandising Accounting Cycle 9. Financial Analysis and Interpretation Chapter 6 Accounting for Merchandising Accounting for Merchandising Businesses Businesses
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C6 - 1 Learning Objectives 1.Nature of Merchandising Business 2.Accounting for Purchases 3.Accounting for Sales 4.Transportation Costs 5.Merchandise Transactions.
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C6 - 1
Learning Objectives
1. Nature of Merchandising Business2. Accounting for Purchases3. Accounting for Sales4. Transportation Costs5. Merchandise Transactions6. Merchandising Chart of Accounts7. Merchandising Income Statement8. Merchandising Accounting Cycle9. Financial Analysis and Interpretation
Chapter 6 Accounting for Merchandising Businesses Accounting for Merchandising Businesses
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Nature of merchandise business
Service business– Provide service – Usually it is a small business
Merchandise business– Purchase and sell merchandise inventory– Bigger than service business
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Service Co. Income Statement Year ended June 30, 20xxService revenue $xxxExpenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xx
Merchandising Co. Income StatementYear ended June 30, 20xxSales revenue $xxxCost of goods sold xGross profit xxOperating expenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xx
Comparison of Income Statements: Service Co. And Merchandising Co.
Comparison of Income Statements: Service Co. And Merchandising Co.
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• sales revenue or sales– the amount that a business earns from selling
merchandise inventory is called sales revenue, or sales.
• cost of merchandise sold– the major expense of a merchandiser is cost of goods
sold.
• Gross margin or Gross profit– The excess of sales over cost of sales is called gross
margin.
• Merchandise inventory– Merchandise on hand at the end of an account period
Special terms
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Compute the net income
• Service business:– Fees earned – operating expenses = net income
• Merchandise business:– Sales – cost of merchandise sold = gross profit
– Gross profit – operating expenses = net income
The cost of merchandise sold is the largest expense for the merchandise business, say 70% or more
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Income Statement ComparisonIncome Statement Comparison
Fees earned $150,000
Operating expenses 120,000
Net income $ 30,000
Service Business
Sales revenue $600,000
Cost of mdse. sold 450,000
Gross profit $150,000
Operating expenses 120,000
Net income $ 30,000
Merchandising Business
20% of revenues
5% of revenues
75% of revenues
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Merchandise Inventory
Merchandising involves selling inventory
Inventory is usually an important asset
Inventory must be accounted for periodically or perpetually
Inventory system Perpetual inventory system
Periodic inventory system
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Perpetual inventory system
• In a perpetual inventory system, each purchase and the cost of each sale are recorded in Merchandise Inventory.
• Most companies using the perpetual inventory system.
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Periodic inventory system
• In a periodic inventory system, the inventory records do not show the amount available for sale or sold during the period. Instead, a detailed listing of merchandise for sale at the end of the accounting period is prepared by the physical count.
• This physical inventory is used to determine the cost of the merchandise inventory on hand and the cost of merchandise sold.
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Continuous determination of inventory value
Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on
those items
Advantages of Using Perpetual InventoryAdvantages of Using Perpetual Inventory
• Under the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer.– Selling merchandise inventory $800– Term: FOB shipping point– Transportation cost $45
Illustration of Accounting formerchandise inventory
Seller: Scully company
Buyer: Burton company
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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory
Description Debit Credit
Accts. Receivable 7,500Sales 7,500
Cost of Mdse. Sold 4,500Mdse. Inventory 4,500
No entry
Mdse. Inventory 7,500Accts. Payable 7,500
Mdse. Inventory 150 Cash 150
SellerSeller BuyerBuyerDescription Debit Credit
July1. Merchandise was sold with credit terms of n/45.
July 2. Paid transportation cost.
Recorded at full costRecorded at full cost
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
Mdse. Inventory 5,000Accts. Payable 5,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Transportation Out 250Cash 250
Mdse. Inventory 5,000Accts. Payable 5,000
No entry.
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5.
Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
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Accts. Receivable 5,000Sales 5,000
Cost of Mdse. Sold 3,500Mdse. Inventory 3,500
Transportation Out 250Cash 250
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Sales Ret. & Allow. 1,000Accts Receivable 1,000
Mdse. Inventory 700Cost of Mdse. Sold 700
Mdse. Inventory 5,000Accts. Payable 5,000
No entry.
Accts. Payable 1,000Mdse. Inventory 1,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.
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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Cash 4,000Accts. Receivable 4,000
Accts. Payable 4,000Cash 4,000
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 15. Scully Company received payment from Burton Co. for purchase of July 5.
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Cash 4,000Accts. Receivable 4,000
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Description Debit Credit
Accts. Receivable 12,500Sales 12,000Cash 500
Cost of Mdse. Sold 7,200Mdse. Inventory 7,200
Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)
Description Debit Credit
July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.
Accts. Payable 4,000Cash 4,000
Mdse. Inventory 12,500
Accts. Payable 12,500
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Cash 4,000Accts. Receivable 4,000
Accts. Receivable 12,500Sales 12,000Cash 500
Cost of Mdse. Sold 7,200Mdse. Inventory 7,200
Accounting for Merchandise TransactionsAccounting for Merchandise Transactions
Total current liabilities $30,360Long-term liabilities:
Note payable (due 2004) 20,000
Total liabilities $ 50,360 Owner’s Equity
Chris Clark, capital 211,200
Total liabilities and owner’s equity $261,560
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Merchandise inventory shrinkage
• Book records: $63,950
• Physical inventory : $ 62,150
• Inventory shortage: $ 1,800
• Adjusting:Cost of merchandise sold 1800
Merchandise inventory 1800
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Profitability AnalysisProfitability Analysis
Profitability is the ability of an entity to earn profits.
This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.
Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.
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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 Assets