Copyright © 2016 by McGraw-Hill Education Chapter 6 Merchandising Operations and the Multistep Income Statement PowerPoint Author: Brandy Mackintosh, CA.

Copyright © 2016 by McGraw-Hill Education

Chapter 6Merchandising Operations and the Multistep Income Statement

PowerPoint Author:Brandy Mackintosh, CA

6-2

Learning Objective 6-1

Distinguish between service and merchandising operations.

6-3

Operating Cycles

6-4

Operating Cycles

(in thousands) (in millions)

(in thousands) (in millions)

6-5


Explain the differences between periodic and

perpetual inventory systems.

6-6

-

= Gross Profit

Inventory SystemsThree accounts are particularly important to

a merchandiser:

Inventory The merchandiser’s total cost of acquiring goods that it has not yet sold

Total selling price of all goods that the merchandiser did sell to customers

Total cost of all goods that the merchandiser did sell to customers

Sales Revenue

Cost of Goods Sold

6-7

Inventory Systems

BI + P – EI = CGS or BI + P – CGS = EI $4,800 + 10,200 – 6,000 = $9,000 $4,800 + 10,200 – 9,000 = $6,000

6-8

Periodic Inventory SystemA periodic inventory system updates the inventory records for merchandise purchases,sales, and returns only at the end of the accounting period.

To determine how much inventory is on hand and how much inventory has been sold, periodic systems require that inventory be physically counted by the employees at the end of the period.

BI + P – EI = CGS

6-9

Perpetual Inventory System

In a perpetual inventory system, the inventory records are updated

“perpetually,” that is, every time inventory is bought,

sold, or returned.

Perpetual systems often are combined with bar codes and

optical scanners.

6-10

Inventory Control

Perpetual Inventory System

Can Estimate

Shrinkage

Periodic Inventory System

No Up-to-Date Records

Can’t Estimate

Shrinkage

Continuous Tracking

6-11


Analyze purchase transactions under a perpetual inventory

system.

6-12

Recording Inventory Purchases

We will now look at the accounting for inventory purchases, as well as

transportation costs, purchase returns and allowances, and purchase

discounts. We will record all inventory-related transactions in the Inventory

account.

6-13

Inventory Purchases

Walmart receives $10,500 of bikes purchased on account.

1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+

Inventory +$10,500 AccountsPayable +$10,500

2 Record

Inventory Accounts Payable 10,500

10,500

6-14

Transportation Cost

Walmart pays $400 cash to a trucker who delivers the$10,500 of bikes to one of its stores.


Cash -$400Inventory +$400

2 Record

Inventory Cash 400

400

6-15

Purchase Returns and Allowances

Walmart returned some of the bikes to thesupplier and received a $500 reduction in the balance owed.


Inventory -$500 AccountsPayable -$500

2 Record

Accounts Payable Inventory 500

500

6-16

Purchase Discounts

Walmart’s bike purchase for $10,500 had terms of 2/10, n/30. Recall that Walmart returned inventory costing $500

and received a $500 reduction in its Accounts Payable. Walmart paid within the discount period.


Cash -$9,800Inventory -$200

AccountsPayable -$10,000

2 Record

Accounts Payable Cash Inventory

9,800200

10,000

6-17

Summary of Inventory Transactions

6-18


Analyze sales transactions under a perpetual inventory

system.

6-19

Recording Inventory Sales

Merchandisers earn revenues by transferring control of merchandise to a customer, either for

cash or on credit.

For a merchandiser who is shipping goods to a customer, the transfer of control occurs at one of two possible times:1. FOB shipping point —the sale is recorded when the

goods leave the seller’s shipping department.2. FOB destination —the sale is recorded when the

goods reach their destination (the customer).

6-20

Recording Inventory Sales

Every merchandise sale has two components, each of which requires an entry in a perpetual

inventory system.Selling Price

Cost

6-21

Recording Inventory SalesWalmart sells two Schwinn mountain bikes at a selling price of

$200 per bike, for a total of $400 cash. The bikes had previously been recorded in Walmart’s Inventory at a cost of

$175 per bike, for a total cost of $350.


Cash +$400Inventory -$350

Sales Revenue +$400Cost of Goods Sold -$350

2 Record

Cash Sales Revenue Cost of Goods Sold Inventory

400

350

400

350

6-22

Sales Returns and Allowances

When goods sold to a customer arrive in damaged condition or are otherwise

unsatisfactory, the customer can (1) return them for a full refund or

(2) keep them and ask for a reduction in the selling price, called an allowance.

6-23

Sales Returns and AllowancesSuppose that after Walmart sold the two Schwinn mountain bikes, the customer returned one to Walmart. Assuming that

the bike is still like new, Walmart would refund the $200 selling price to the customer and take the bike back into inventory.


Cash -$200

Inventory +$175

Sales Returns and Allowances (+xR) -$200Cost of Goods Sold +$175

2 Record

Sales Returns & Allowances (+xR) Cash Inventory Cost of Goods Sold

200

175

200

175

6-24

Sales on Account and Sales DiscountsSuppose Walmart’s warehouse store (Sam’s Club) sells

printer paper on account to a local business for $1,000 with payment terms of 2/10, n/30. The paper had cost Sam’s Club

$700.

2 Record

Accounts Receivable Sales Revenue Cost of Goods Sold Inventory

1,000

700

1,000

700


Accounts Receivable+$1,000Inventory -$700

Sales Revenue +$1,000Cost of Goods Sold -$700

6-25

2 Record

Cash Sales Discounts (+xR) Accounts Receivable 1,000

98020

Sales on Account and Sales DiscountsTo take advantage of this 2% discount, the customer must pay Walmart within 10 days. If the customer does so, it will deduct the $20 discount (2% $1,000) from the total owed ($1,000),

and then pay $980 to Walmart.

(2% × $1,000)


Cash +$980Accounts Receivable -$1,000

Sales Discounts (+xR) -$20

6-26

Summary of Sales-Related Transactions

The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.

6-27


Prepare and analyze a merchandiser’s multistep

income statement.

6-28

Multistep Income Statement

6-29

Gross Profit Analysis

GrossProfit %

=Gross ProfitNet Sales

× 100

6-30

Comparing Gross Profit Percentages


Supplement 6A

Recording Inventory Transactions in a Periodic System

6-32

Learning Objective 6-S1

Record inventory transactions in a periodic system.

6-33


Jan. 1 Beginning inventory: 80 units at a cost of $60.Apr. 14 Purchased 170 additional units on account at a cost of $60.Nov. 30 Sold 150 units on account at a unit sales price of $80.Dec. 31 Counted 100 units at a unit cost of $60.

An electronics retailer stocks and sells just one item and the following events occurred:

We will record these events assuming the company usesa periodic inventory system and then compare the

periodic inventory system to a perpetual inventory system.

6-34


Periodic Inventory System Perpetual Inventory System

6-35


Periodic Inventory System

BI + P – EI = CGS

End-of-year adjustment entries are not required using a perpetual inventory system.

6-36


Summary of the Effects on the Accounting Equation


Chapter 6Solved Exercises

M6-2, M6-16, E6-3, E6-5, E6-13, E6-20

6-38

M6-2 Calculating Shrinkage in a Perpetual Inventory SystemCorey’s Campus Store has $4,000 of inventory on hand at the beginning of the month. During the month, the company buys $41,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $13,000 of inventory is on hand. How much shrinkage occurred during the month?

Beginning inventory Purchases Cost of Goods Sold Ending balance Inventory count Shrinkage

$ 4,000+41,000-30,00015,000

-13,000$ 2,000

6-39

M6-16 Interpreting Changes in Gross Profit PercentageLuxottica Group, the Italian company that sells Ray Ban and Oakley sunglasses, reported net sales of €7.1 billion in 2012 and €6.2 billion in 2011. Gross profit increased from €4.1 billion in 2011 to €4.7 billion in 2012. Was the increase in gross profit caused by (a) an increase in gross profit per sale, (b) an increase in sales volume, or (c) a combination of (a) and (b)?

Net SalesCost of Goods SoldGross Profit

Gross Profit Percentage

20116.22.14.1

66.1%

20127.12.44.7

66.2%

(in billions of euro)

6-40

E6-3 Identifying Shrinkage and Other Missing Inventory InformationCalculate the missing information for each of the following independent cases:

Case

A

B

C

D

Beg. Inventor

y

$100

200

150

260

Purchases

$700

800

500

600

Cost of Goods Sold

$300

850

200

650

Ending Inventory

(perpetual)

Ending Inventory

(As Counted)Shrinkage

$500

150

450

210

$420

150

440

200

$80

0

10

10

? ?

? ?

?? ?

6-41

E6-5 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for each of the following independent cases.

6-42

E6-5 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for each of the following independent cases.

$300

?

200

650

?

Case

A

B

C

D

E

Sales Revenue

$700

900

?

800

1,000

Beginning Inventory

$100

200

100

?

50

Purchases

$800

800

?

600

900

Cost of Goods

Available

Cost of Goods Sold

Cost of Ending

Inventory

$?

150

300

250

?

?

?

?

?

?

Gross Profit

$?

?

400

?

500

900 600 400

8501,000 50

500400600

150900300

500950 450

6-43

E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.

Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.

Jan. 6 Accounts Receivable Sales Revenue

Cost of Goods Sold Inventory

100

70

100

70

6-44



Jan. 6 Accounts Receivable Sales Revenue


80

60

80

60

6-45



Jan. 14 Cash ($100 x 98%)Sales Discounts ($100 x 2%) Accounts Receivable 100

982

6-46



Feb. 2 Cash Accounts Receivable 80

80

6-47



Feb. 28 Accounts Receivable Sales Revenue


50

30

50

30

6-48

E6-20 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for the income statement of Williamson Company for each of the following independent cases:

Sales RevenueSales Returns and AllowancesNet SalesCost of Goods SoldGross Profit

Case B

$ 6,000 500

5,500 4,050$ 1,450

Case A

$ 8,000 150

7,850 5,750$ 2,100

Case C

$ 6,195 275

5,920 5,400$ 520

6-49

End of Chapter 6

Copyright © 2016 by McGraw-Hill Education Chapter 6 Merchandising Operations and the Multistep Income Statement PowerPoint Author: Brandy Mackintosh, CA.

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