Chapter 5 Merchandising Operationslrbrasher.com/images/Chapter_5_Powerpoint.pdfPerpetual and Periodic Inventory Systems •Businesses need to determine the value of merchandise inventory
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Chapter 5Merchandising
Operations
Chapter 5 Learning Objectives
1. Describe merchandising operations and the two types of merchandise inventory systems
2. Account for the purchase of merchandise inventory using a perpetual inventory system
3. Account for the sale of merchandise inventory using a perpetual inventory system
HOW ARE PURCHASES OF MERCHANDISE INVENTORY RECORDED IN A PERPETUAL
INVENTORY SYSTEM?
• The cycle of a merchandiser begins with the purchase of merchandise inventory.
• An invoice is the seller’s request for payment from the purchaser.– Invoices are also called bills.– Sellers have sales invoices.– Purchasers have purchase invoices
Under credit terms of “3/15, NET 30 DAYS”, If Smart Touch Learning pays on June 15, which is within the discount period, the cash payment entry would be:
The purchase discount is credited to the Merchandise Inventory account because the discount for early payment decreases the actual cost paid for Merchandise Inventory:
On June 10, Smart Touch Learning purchased 15 tablets on account with credit terms of 3/15, n/30 at a cost of $5,250. Five tablets are returned on June 15 for $1,750, and payment is made on June 20.
Purchase agreements specify shipping terms to determine when title of the goods transfers to the purchaser and who pays the freight. • FOB shipping point means the buyer takes
ownership (title) to the goods after the goods leave the seller’s place of business (shipping point). – The buyer (owner of the goods while in transit) usually
pays the freight.• FOB destination means the buyer takes
ownership (title) to the goods at the delivery destination point. – The seller (owner of the goods while in transit) usually
When merchandisers are required to pay for shipping costs:• Freight in is the transportation cost to ship goods
into the purchaser’s warehouse; thus, it is freight on purchased goods.
• Freight out is the transportation cost to ship goods out of the seller’s warehouse and to the customer; thus, it is freight on goods sold to a customer.
Freight In Within Discount Period• Under FOB shipping point, the seller sometimes prepays the
transportation cost as a convenience and lists this cost on the invoice.
• Assume, Smart Touch Learning purchases $5,000 of goods, with freight charge of $400, on June 20 on account with terms of 3/5, n/30. The terms of shipment are FOB shipping point.
Freight In Within Discount PeriodIf Smart Touch Learning pays within the discount period, the discount will be computed only on the $5,000 merchandise cost, resulting in a $150 discount:
During the year, Smart Touch Learning buys $281,750 of inventory, returns $61,250 of the goods, and takes a $4,410 early payment discount. The company also pays $14,700 of freight in. Net costs are calculated as:
When the customer makes payment within the discount period, Smart Touch Learning will record the receipt of cash and decrease the Accounts Receivable for $4,900 as follows:
If the customer does not pay within the discount period, the customer must pay the full $5,000 amount. Smart Touch Learning would record the discount lost as follows:
Estimating Sales ReturnsSmart Touch Learning had sales of $1,000,000 and cost of goods sold of $600,000 for the period. Smart Touch Learning estimates that approximately 4% of the merchandise sold will be returned.
Actual Return of InventoryOn January 20, 2020, a customer returned merchandise purchased with cash with a sales price of $2,000. The cost of the goods was $800.
Sales AllowanceOn January 28, 2020, Smart Touch Learning grants a $100 sales allowance for goods damaged in transit. The goods were sold on account and remain unpaid.
• Other income and expenses reports revenues or expenses that are outside the normal, day-to-day operations of a business, such as a gain or loss on the sale of plant assets or interest expense.
• Income tax expense reports the federal and state income taxes that are incurred by the corporation.
HOW ARE MULTIPLE PERFORMANCE OBLIGATIONS RECORDED IN A
PERPETUAL INVENTORY SYSTEM?
• Companies are required to identify the performance obligations associated with each contract.
• A performance obligation is a contractual promise with a customer to transfer a distinct good or service.
• When contracts involve multiple performance obligations, the company is required to allocate the transaction price to each performance obligation separately.
HOW ARE MULTIPLE PERFORMANCE OBLIGATIONS RECORDED IN A
PERPETUAL INVENTORY SYSTEM?
On November 1 Smart Touch Learning sells one tablet (cost of $350) along with a two-year service contract to a customer for $620 cash. Smart Touch Learning allocates the sales price of $620 as follows: $500 for the tablet and $120 for the two-year service contract.
Referring back to Exhibit 5-3, the entry to record the receipt of goods on account on June 3 and payment on June 15 using the periodic inventory system is as follows:
On June 21, Smart Touch Learning sold 10 tablets for a total sale of $5,000 on account with terms of 2/10, n/30.
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Preparing Financial Statements
• The periodic inventory system requires an additional calculation—the cost of goods sold.
• At the end of each period, the company combines a number of accounts to compute cost of goods sold for the period, and this calculation is shown on the income statement.