Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5.

Slide 5-1

Accounting for Accounting for Merchandising Merchandising

OperationsOperations

Financial Accounting,

Seventh Edition

Chapter 5

Slide 5-2

Service organizations provide a service to earn Service organizations provide a service to earn revenue.revenue.

Examples: Google, Verizon, Fox, Marriott, ESPN.Examples: Google, Verizon, Fox, Marriott, ESPN.

Service organizations provide a service to earn Service organizations provide a service to earn revenue.revenue.

Examples: Google, Verizon, Fox, Marriott, ESPN.Examples: Google, Verizon, Fox, Marriott, ESPN.

RevenuesRevenues ExpensesExpensesMinus Net

incomeNet

incomeEquals

Service ActivitiesService ActivitiesService ActivitiesService Activities

How has the NETFLIX business model changed over time?

Slide 5-3

Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

Merchandising Merchandising CompaniesCompanies

Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as sales revenue or sales.

Slide 5-4


Income MeasurementIncome Measurement

Cost of goods sold (an Expense) is the total cost of merchandise sold during the

period.

Not used in a Service business.

Operating Income (Loss)

Less

LessEquals

Equals

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Slide 5-5

Reporting Income of Merchandising Reporting Income of Merchandising CompanyCompanyReporting Income of Merchandising Reporting Income of Merchandising CompanyCompany

WAL-MART STORES, Inc.Consolidated Statement of Income

For the year ended January 31, 2012(all amounts in millions)

Slide 5-6

Reporting Income of Merchandising Reporting Income of Merchandising CompanyCompanyReporting Income of Merchandising Reporting Income of Merchandising CompanyCompany

BEST BUY COMPANY, Inc.Consolidated Statement of IncomeFor the year ended March 3, 2012(all amounts in millions of dollars)

Slide 5-7

How Big is WAL-MART?How Big is WAL-MART?How Big is WAL-MART?How Big is WAL-MART?

Slide 5-8

Knowledge Check Question:Knowledge Check Question:In its income statement, a company reported In its income statement, a company reported operating expenses of $157,000. Determine operating expenses of $157,000. Determine sales and gross profit given cost of goods sold sales and gross profit given cost of goods sold was $544,000 and operating loss was $41,000.was $544,000 and operating loss was $41,000.

1.1. Sales: $660,000; Gross Profit: $503,000.Sales: $660,000; Gross Profit: $503,000.




Slide 5-9

Perpetual System

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and

Purchase Discounts are included in Merchandise Inventory.

3. Cost of Goods Sold is increased and Merchandise Inventory

is decreased for each sale.

4. Physical count done to verify Merchandise Inventory

balance.The perpetual inventory system provides a continuous

record of Merchandise Inventory and Cost of Goods Sold.


Flow of Costs

Slide 5-10

+

+

Cost of Beginninginventory

Cost of Beginninginventory

Net cost ofpurchasesNet cost ofpurchases

Cost of goodsavailable for sale Cost of goodsavailable for sale

Cost of Ending inventory

Cost of Ending inventory

Cost of goodssold

Cost of goodssold

==


Slide 5-11

Knowledge CheckKnowledge Check::A company’s cost of goods sold was $345,000. A company’s cost of goods sold was $345,000. Determine net cost of purchases and cost of ending Determine net cost of purchases and cost of ending inventory, given cost of goods available for sale were inventory, given cost of goods available for sale were $595,000 and cost of beginning inventory was $120,000.$595,000 and cost of beginning inventory was $120,000.

Net Cost of PurchasesNet Cost of Purchases CCost of Ending Inventoryost of Ending Inventory1.1. $475,000$475,000 $250,000$250,000

2.2. $250,000$250,000 $475,000$475,000

3.3. $475,000$475,000 $225,000$225,000

4.4. $250,000$250,000 $225,000$225,000

Slide 5-12

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.

3. Calculation of Cost of Goods Sold:

Beginning inventory

$ 100,000

Add: Purchases, net

800,000

Goods available for sale

900,000

Less: Ending inventory

125,000

Cost of goods sold

$ 775,000


Flow of CostsPeriodic System

Slide 5-13

Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/09 358-BI

Sold To

Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000 We appreciate your business! Ship Chg. -

Tax - Total 27,000$

Sample Invoice

Seller Invoice date

PurchaserOrder numberCredit terms Freight terms

GoodsInvoice amount

Seller Invoice date

PurchaserOrder numberCredit terms Freight terms

GoodsInvoice amount

4-13

Slide 5-14

On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on

account (terms: 2/10, n 30).

On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on

account (terms: 2/10, n 30).

Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise

Slide 5-15

FOB shipping point(buyer pays freight

costs)

FOB destination(seller pays

freight costs)

Merchandise

Seller Buyer

Recording Transportation CostsRecording Transportation CostsRecording Transportation CostsRecording Transportation Costs

Slide 5-16

On February 1, Wally Mart purchased merchandise On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 inventory (fob shipping point), and paid $600

transportation costs in cash.transportation costs in cash.

On February 1, Wally Mart purchased merchandise On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 inventory (fob shipping point), and paid $600

transportation costs in cash.transportation costs in cash.

Recording Purchase of Merchandise Recording Purchase of Merchandise along with Transportation Costsalong with Transportation Costs

Recording Purchase of Merchandise Recording Purchase of Merchandise along with Transportation Costsalong with Transportation Costs

Slide 5-17

Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.

Purchase Returns and Allowances

Recording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandiseRecording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandise

Return goods for credit if the sale was made on

credit, or for a cash refund if the purchase

was for cash.

May choose to keep the merchandise if the seller will grant an

allowance (deduction) from the purchase

price.

Purchase Return Purchase Allowance

Slide 5-18

On February 4, Wally Mart returned $1,000 of On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier.defective merchandise to the supplier.

On February 4, Wally Mart returned $1,000 of On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier.defective merchandise to the supplier.

Recording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandiseRecording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandise

Slide 5-19

2/10,n/302/10,n/30Discount Percent

Discount Percent

Number of Days

Discount Is

Available

Number of Days

Discount Is

Available

Otherwise, Net (or

All) Is Due

Otherwise, Net (or

All) Is Due

CreditPeriodCreditPeriod

Recording Purchase DiscountsRecording Purchase DiscountsRecording Purchase DiscountsRecording Purchase Discounts

A deduction from the invoice price granted to induce A deduction from the invoice price granted to induce early payment of the amount due.early payment of the amount due.

Advantages:Advantages:

Purchaser saves money.Purchaser saves money.

Seller shortens the operating cycle.Seller shortens the operating cycle.

A deduction from the invoice price granted to induce A deduction from the invoice price granted to induce early payment of the amount due.early payment of the amount due.

Advantages:Advantages:

Purchaser saves money.Purchaser saves money.

Seller shortens the operating cycle.Seller shortens the operating cycle.

Slide 5-20

Purchase Discount TermsTerms

Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise

2% discount if paid within 10

days, otherwise net amount due

within 30 days.

1% discount if paid within

first 10 days of next month.

2/10, n/30 1/10 EOM

Net amount due within the first 10 days of the next

month.

n/10 EOM

Slide 5-21

On February 10, the last day of the discount period, On February 10, the last day of the discount period, Wally Mart paid the Wally Mart paid the balance due for the Feb 1 balance due for the Feb 1 purchase. Prepare the journal entry for payment.purchase. Prepare the journal entry for payment.

On February 10, the last day of the discount period, On February 10, the last day of the discount period, Wally Mart paid the Wally Mart paid the balance due for the Feb 1 balance due for the Feb 1 purchase. Prepare the journal entry for payment.purchase. Prepare the journal entry for payment.

Recording Payments, net of Returns and Recording Payments, net of Returns and DiscountsDiscounts

Recording Payments, net of Returns and Recording Payments, net of Returns and DiscountsDiscounts

Slide 5-22

Recording Payments without discountRecording Payments without discountRecording Payments without discountRecording Payments without discount

If Wally Mart failed to take the discount, and If Wally Mart failed to take the discount, and instead made full payment on February 15, the instead made full payment on February 15, the

journal entry would be:journal entry would be:

If Wally Mart failed to take the discount, and If Wally Mart failed to take the discount, and instead made full payment on February 15, the instead made full payment on February 15, the

journal entry would be:journal entry would be:

Slide 5-23

Knowledge Check:Knowledge Check:Tony Company purchased $8,500 of Tony Company purchased $8,500 of merchandise on September 25 on terms of 1/10, merchandise on September 25 on terms of 1/10, n30. On September 27, Tony returned defective n30. On September 27, Tony returned defective merchandise worth $700, and received full merchandise worth $700, and received full credit. The invoice was paid in full on credit. The invoice was paid in full on September 30. Tony’s journal entry on September 30. Tony’s journal entry on September 30 will include:September 30 will include:

1.1. A credit to merchandise inventory for $700.A credit to merchandise inventory for $700.

2.2. A debit to accounts payable for $7,800.A debit to accounts payable for $7,800.

3.3. A credit to cash for $8,415A credit to cash for $8,415

4.4. A credit to Merchandise Inventory for $85.A credit to Merchandise Inventory for $85.

Slide 5-24

Two Journal Entries to Record a Sale:

Cash or Accounts receivable XXX

Sales XXX

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

#1

Cost of goods sold XXX

Merchandise inventory XXX#2

Selling

Price

Cost

Made for cash or credit (on account).

Normally recorded when earned, usually when goods transfer from seller to buyer.

Sales invoice should support each credit sale.

Slide 5-25

On February 11, Wally Mart sold $1,000 of On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise merchandise on account. The merchandise was carried in inventory at a cost of $700. was carried in inventory at a cost of $700.

Credit Terms were 3/10, n 30. Credit Terms were 3/10, n 30.

On February 11, Wally Mart sold $1,000 of On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise merchandise on account. The merchandise was carried in inventory at a cost of $700. was carried in inventory at a cost of $700.

Credit Terms were 3/10, n 30. Credit Terms were 3/10, n 30.

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

Slide 5-26

On February 13, a customer returned merchandise On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to with a sales price of $300 and a cost of $210 to

Wally Mart . The return is related to the Feb 11 sale. Wally Mart . The return is related to the Feb 11 sale. Assume the goods were NOT defective.Assume the goods were NOT defective.

On February 13, a customer returned merchandise On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to with a sales price of $300 and a cost of $210 to

Wally Mart . The return is related to the Feb 11 sale. Wally Mart . The return is related to the Feb 11 sale. Assume the goods were NOT defective.Assume the goods were NOT defective.

Sales Returns and Allowances is a contra revenue account.Sales Returns and Allowances is a contra revenue account.

Recording Returns of Merchandise Recording Returns of Merchandise SoldSoldRecording Returns of Merchandise Recording Returns of Merchandise SoldSold

Slide 5-27

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns and

allowances as a percentage of sales.

could distort comparisons between total sales

in different accounting periods.

Sales Returns and Allowances

Recording returns of Merchandise Recording returns of Merchandise SoldSoldRecording returns of Merchandise Recording returns of Merchandise SoldSold

Slide 5-28

On February 13, a customer returned merchandise with On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the . The return is related to the Feb 11 sale. Assume the

returned goods were defective, and had a scrap returned goods were defective, and had a scrap value of $50. The journal entry would be:value of $50. The journal entry would be:

On February 13, a customer returned merchandise with On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the . The return is related to the Feb 11 sale. Assume the

returned goods were defective, and had a scrap returned goods were defective, and had a scrap value of $50. The journal entry would be:value of $50. The journal entry would be:

Recording Returns of Merchandise Recording Returns of Merchandise SoldSoldRecording Returns of Merchandise Recording Returns of Merchandise SoldSold

Slide 5-29

On February 17, Wally Mart received the net On February 17, Wally Mart received the net amount owed from the sale of Feb 11.amount owed from the sale of Feb 11.

On February 17, Wally Mart received the net On February 17, Wally Mart received the net amount owed from the sale of Feb 11.amount owed from the sale of Feb 11.

Sales Discounts is a contra revenue account.Sales Discounts is a contra revenue account.

Cash Receipts, net of Returns and Cash Receipts, net of Returns and DiscountsDiscountsCash Receipts, net of Returns and Cash Receipts, net of Returns and DiscountsDiscounts

Slide 5-30

Knowledge Check:Knowledge Check:On July 26, Tyler Company makes a sale for $500 On July 26, Tyler Company makes a sale for $500 to Pauli Company. The cost of the merchandise to Pauli Company. The cost of the merchandise sold was $300. On August 1, Pauli Company sold was $300. On August 1, Pauli Company returned the merchandise, which is not defective, returned the merchandise, which is not defective, and is restored back to the inventory. What is and is restored back to the inventory. What is the effect of the August 1 transaction on Total the effect of the August 1 transaction on Total assets and Equity for Tyler Company?assets and Equity for Tyler Company?

1.1. Total assets increase $300;Equity increases $300.Total assets increase $300;Equity increases $300.

2.2. Total assets decrease $500; Equity decreases $500.Total assets decrease $500; Equity decreases $500.

3.3. Total assets decrease $200; Equity decreases $200.Total assets decrease $200; Equity decreases $200.

4.4. Total assets increase $200; Equity increases $200.Total assets increase $200; Equity increases $200.

Slide 5-31

Generally the same as a service company.

One additional adjustment to make the records

agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Adjusting Entries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

Slide 5-32

At the end of accounting period, Wally Mart’s At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted Inventory Account shows an unadjusted

balance of $15,000, but a physical count shows balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. that only $14,300 of inventory on hand.

Determine the adjusting entry for Shrinkage.Determine the adjusting entry for Shrinkage.

At the end of accounting period, Wally Mart’s At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted Inventory Account shows an unadjusted

balance of $15,000, but a physical count shows balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. that only $14,300 of inventory on hand.

Determine the adjusting entry for Shrinkage.Determine the adjusting entry for Shrinkage.

Adjusting Entry for ShrinkageAdjusting Entry for ShrinkageAdjusting Entry for ShrinkageAdjusting Entry for Shrinkage

Slide 5-33

Shows several steps in determining net

income.

Two steps relate to principal operating

activities.

Distinguishes between operating and non-

operating activities.

Multiple-Step Income Statement

Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements

Slide 5-34

Income Statement Presentation of Sales

Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement

Slide 5-35

Illustration 5-13

Key Items:Key Items:

Net salesNet sales

Gross profitGross profit

Gross profit Gross profit raterate

Illustration 5-10

Gross Profit

Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement

Slide 5-36

Forms of Forms of Financial Financial StatementStatementss



Net salesNet sales


Operating Operating expensesexpenses

Illustration 5-13

Multiple-Step

Slide 5-37




Net salesNet sales


Operating Operating expensesexpenses

Nonoperating Nonoperating activitiesactivities

Net incomeNet income

Illustration 5-13

Slide 5-38

Subtract total expenses from total revenues

Two reasons for using the single-step format:

1) Company does not realize any type of profit until total revenues exceed total expenses.

2) Format is simpler and easier to read.

Single-Step Income Statement


Slide 5-39

Illustration 5-14

Single-Step


Slide 5-40


Illustration 5-15Classified Balance Sheet

Slide 5-41

End of Chapter 5

Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5.

Documents

companys cost of goods

calculation of cost

total cost of merchandise

net cost of purchasescost

merchandise inventory

perpetual inventory

income statement

operating income loss