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Home Depot Inc.Condensed Income StatementFor the Year Ending December 28, 2001
(in millions)
Net sales $45,738Cost of merchandise sold 32,057Gross profit $13,681Operating expenses 9,490Operating income $ 4,191Other income 26Income before taxes $ 4,217Income taxes 1,636Net income $ 2,581
Home Depot Inc.Condensed Income StatementFor the Year Ending December 28, 2001
(in millions)
Net sales $45,738Cost of merchandise sold 32,057Gross profit $13,681Operating expenses 9,490Operating income $ 4,191Other income 26Income before taxes $ 4,217Income taxes 1,636Net income $ 2,581
The revenue account for
merchandise is Sales.
The revenue account for
merchandise is Sales.
The cost of merchandise sold is matched against
net sales.
The cost of merchandise sold is matched against
net sales.
Net sales is the revenue received from selling merchandise less
any merchandise returned or any discounts reported.
Net sales is the revenue received from selling merchandise less
any merchandise returned or any discounts reported.
Revenue minus cost provides gross profit.
Revenue minus cost provides gross profit.
What’s different on a What’s different on a merchandising income statement?merchandising income statement?
What’s different on a What’s different on a merchandising income statement?merchandising income statement?
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Describe and illustrate the financial statements of a merchandising business.2
Learning ObjectivesLearning Objectives
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Online SolutionsIncome Statement
For the Year Ended December 31, 2007
Net sales $708,255Cost of merchandise sold 525,305Gross profit $182,950Operating expenses 105,710Operating income $ 77,240Other income and expense (net) (1,840)Operating income before taxes $ 75,400Income taxes 15,000Net income $ 60,400
Multiple-Step Income StatementMultiple-Step Income Statement
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A Purchase return is the cost of the merchandise returned to the seller.
A Purchase return is the cost of the merchandise returned to the seller.A Purchase allowance is a reduction in purchase price because the item has a defect or was the wrong item ordered.
A Purchase allowance is a reduction in purchase price because the item has a defect or was the wrong item ordered.
Multiple-Step Income StatementMultiple-Step Income Statement
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Purchases $521,980Less: Purchases returns and allowances $9,100
Transportation-in is the shipping cost paid by the buyer for merchandise. Note that this freight payment increases the cost of the merchandise. It is not an expense.
Transportation-in is the shipping cost paid by the buyer for merchandise. Note that this freight payment increases the cost of the merchandise. It is not an expense.
Multiple-Step Income StatementMultiple-Step Income Statement
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“Cost of merchandise purchased” is a major portion of the cost of merchandise sold section, which
follows the revenue section.
“Cost of merchandise purchased” is a major portion of the cost of merchandise sold section, which
follows the revenue section.
Multiple-Step Income StatementMultiple-Step Income Statement
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Note on the next slide that the only change is that the section begins by adding the beginning
inventory and ends by subtracting the ending inventory.
Note on the next slide that the only change is that the section begins by adding the beginning
inventory and ends by subtracting the ending inventory.
Multiple-Step Income StatementMultiple-Step Income Statement
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Purchases discounts 2,525 11,625Net purchases $510,355Add transportation-in 17,400 Cost of merchandise purchased 527,755Merchandise available for sale $587,455Less merchandise inventory, Dec. 31, 2007 62,150Cost of merchandise sold $525,305
Detailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold Section
Multiple-Step Income StatementMultiple-Step Income Statement
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This income statement was prepared using the periodic
inventory method. The number of units on hand was
determined by a physical count.
This income statement was prepared using the periodic
inventory method. The number of units on hand was
determined by a physical count.
Multiple-Step Income StatementMultiple-Step Income Statement
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In contrast, a perpetual inventory system keeps a running amount for each item as it is bought and sold. A physical count is still necessary
for verification purposes.
In contrast, a perpetual inventory system keeps a running amount for each item as it is bought and sold. A physical count is still necessary
for verification purposes.
Multiple-Step Income StatementMultiple-Step Income Statement
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Online SolutionsIncome Statement
For the Year Ended December 31, 2007
Revenue:Net sales $708,255
Expenses:Cost of merchandise sold $525,305Operating expenses 105,710Income taxes 15,000Other income and expense (net) 1,840 647,855
Net income $ 60,400
Single-Step Income StatementSingle-Step Income Statement
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Online SolutionsRetained Earnings StatementFor the Year Ended December 31, 2007
Retained earnings, January 1, 2007 $128,800Net income for the year $60,400Less dividends 18,000Increase in retained earnings 42,400Retained earning, December 31, 2007 $171,200
Depreciation expense—office equipment 2,490Decrease in office supplies 120Decrease in prepaid insurance 350Increase in accounts payable 8,150 14,210
ContinuedContinuedContinuedContinued
Statement of Cash FlowsStatement of Cash Flows
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Deduct: Increase in accounts receivable $(24,080)Increase in merchandise inventory (2,450)Decrease in salaries payable (360)Decrease in unearned rent (600) (27,400)
Net cash flow form operating activities $47,120Cash flows from investing activities:
Purchase of store equipment $ (7,100)Purchase of office equipment (5,570)Net cash flows used in investing activities (12,670)
Cash flows from financing activities:Payment of note payable $ (5,000)Payment of dividends (18,000)Net cash flows used in financing activities (23,000)
Net increase in cash $11,450January 1, 2007 cash balance 41,500December 31, 2007 cash balance $ 52,950
31 of 64Visit UMT online at www.umtweb.eduChapter 4, ACCT125
Describe the accounting for the sale of merchandise.3
Learning ObjectiveLearning Objective
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On January 3 Online Solutions sells merchandise costing $1,200 for
$1,800. The customer charges the purchase on a MasterCard.
On January 3 Online Solutions sells merchandise costing $1,200 for
$1,800. The customer charges the purchase on a MasterCard.
Transactions involving MasterCard or Visa are treated as cash sales.
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Cash sales of $1,800 on January 3; cost of merchandise sold, $1,200.
LiabilitiesJan. 3
Jan. 3
Net Effect
Revenue Net IncomeJan. 3 Sales 1,800 1,800
Jan. 3 -1,200
1,800 6001,200
Trans. Date
Trans. Date
Income StatementExpense
Cost of Merch. Sold 1,200
Retained Earnings
(Net Income)
Merch. Inv. - 1,200
600 600
Balance SheetAssets Stockholders' Equity
Cash 1,800
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2/10, n/30Credit Terms
The buyer is allowed a 2% discount if…
…the account is paid within 10
days.
The net (full) amount is due by
the 30th day.
Sales DiscountsSales Discounts
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On January 12 Online Solutions sells merchandise on account to Omega Tech for $1,500. Credit terms are 2/10, n/30.
LiabilitiesJan. 12
Net Effect
Revenue Net IncomeJan. 12 Sales 1,500
Net Effect 1,500
Balance SheetAssets Stockholders' Equity
Accounts Rec. 1,500
1,500 1,500
Retained Earnings
Trans. Date
Trans. Date
Income StatementExpense
Sales DiscountsSales Discounts
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Payment is received from Omega Tech on January 22.
LiabilitiesJan. 22
Jan. 22
Net Effect
Revenue Net IncomeJan. 22 Sales Dis. 30 -30
Net Effect 30 -30
Trans. Date
Trans. Date
Income StatementExpense
Retained Earnings
(Net Income)
Accounts Rec. - 1,500
-30 -30
Balance SheetAssets Stockholders' Equity
Cash 1,470
Sales DiscountsSales Discounts
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On January 13 Online Solutions issues a $2,000 credit memorandum to Krier Company for merchandise that was returned. The merchandise (cost $1,200) was sold on account.
LiabilitiesJan. 13
Jan. 13
Net Effect
Revenue Net IncomeJan. 13 SR&A 2,000 -2,000
Jan. 13 1,200
Net Effect 2,000 -800
Trans. Date
Trans. Date
Income StatementExpense
Cost of Merch. Sold -1,200
Retained Earnings
(Net Income)
Merch. Inv. 1,200
-800 -800
Balance SheetAssets Stockholders' Equity
Accounts Rec. -2,000
Sales Returns and AllowancesSales Returns and Allowances
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Describe the accounting for the purchase of merchandise.4
Learning ObjectiveLearning Objective
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On January 6 Online Solutions purchased $2,500 of merchandise on account (terms: 1/15, n/30). Recall that Online Solutions uses the perpetual system.
LiabilitiesJan. 3 A/Pay. 2,500
Net Effect 2,500
Revenue Net Income
Trans. Date
Trans. Date
Income StatementExpense
2,500
Balance SheetAssets Stockholders' Equity
Merch. Inv. 2,500
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On January 21 Online Solutions pays invoice of $1,800, terms 1/15, n/30 within the discount period.
LiabilitiesJan. 21 A/P -1,800
Jan. 21
Net Effect -1,800
Revenue Net Income
Trans. Date
Trans. Date
Income StatementExpense
Cash - 1,782
-1,800
Balance SheetAssets Stockholders' Equity
Merch. Inv. -18
Purchase DiscountsPurchase Discounts
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On January 22 Online Solutions returns $5,000 of merchandise purchased from Quantum Inc.
LiabilitiesJan. 22 A/P -5,000
Net Effect -5,000
Revenue Net Income
Trans. Date
Trans. Date
Income StatementExpense
-5,000
Balance SheetAssets Stockholders' Equity
Merch. Inv. -5,000
Purchase Returns and Purchase Returns and AllowancesAllowances
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Describe the accounting for transportation costs and sales taxes.5
Learning ObjectiveLearning Objective
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PhilPhil’s ’s TruckTruckiinn
gg
Transportation CostsTransportation Costs
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On January 19 Online Solutions buys merchandise from Data Max on account, $2,900, terms FOB shipping point, and prepays the transportation cost of
$150.
LiabilitiesJan. 19 A/P 2,900
Jan. 19
Jan. 19
Net Effect 2,900
Revenue Net Income
Trans. Date
Trans. Date
Income StatementExpense
2,900
Merch. Inv. 150
Cash - 150
Balance SheetAssets Stockholders' Equity
Merch. Inv. 2,900
Transportation CostsTransportation Costs
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Illustrate the dual nature of merchandising transactions.6
Learning ObjectiveLearning Objective
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July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise
sold was $4,500
Liabilities1-Jul
1-Jul
Net Effect
Revenue Net Income1-Jul Sales 7,500 7,500
Jan. 3 -4,500
7,500 3,000
Balance SheetAssets Stockholders' Equity
Accts. Rec. 7,500
(Net Income)
Merch. Inv. - 4,500
3,000 3,000
4,500
Trans. Date
Trans. Date
Income StatementExpense
Cost of Merch. Sold 4,500
Retained Earnings
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July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise sold was $4,500
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Describe the accounting for merchandise shrinkage.7
Learning ObjectiveLearning Objective
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When a company uses a perpetual inventory, a
physical count is taken at the end of the accounting period to determine the
accuracy of the perpetual records and to record any
inventory shrinkage.
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Online Solutions’ inventory records indicate that $63,950 of merchandise should be available for sale on December 31, 2007. The physical inventory taken on
that date indicates that only $62,150 of merchandise is available for sale.
Inventory shrinkage is $1,800Inventory shrinkage is $1,800Inventory shrinkage is $1,800Inventory shrinkage is $1,800
LiabilitiesDec. 31
Net Effect
Revenue Net IncomeDec. 31 1,800
Net Effect 1,800
Trans. Date
Trans. Date
Income StatementExpense
Cost of Merch. Sold 1,800
1,800
(Net Income)
-1,800 -1,800
Retained Earnings
Balance SheetAssets Stockholders' Equity
Merch. Inv. - 1,800
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Describe and illustrate the use of gross profit and operating income in analyzing a company’s operations.
8Learning ObjectiveLearning Objective
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Gross profit and operating income are two important
profitability measures analyst use in assessing…
Gross profit and operating income are two important
profitability measures analyst use in assessing…
…the efficiency and effectiveness of a
merchandiser’s operations.
…the efficiency and effectiveness of a
merchandiser’s operations.
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Net sales $32,004Cost of merchandise sold 22,789Gross profit $ 9,215Operating expenses 8,459Operating income $ 756
$9,2l5$32,004
= 28.8%
Gross Profit PercentGross Profit Percent
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J. C. Penney’s gross profit percentage went from 28.8% to 27.7%, then recovered back to
29.8%.
J. C. Penney’s gross profit percentage went from 28.8% to 27.7%, then recovered back to
29.8%.
Gross Profit PercentGross Profit Percent
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The recovery in the third year was attributed to better merchandise assortment, improved inventory
productivity, and centralized buying.
The recovery in the third year was attributed to better merchandise assortment, improved inventory
productivity, and centralized buying.
Gross Profit PercentGross Profit Percent
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Net sales $32,004Cost of merchandise sold 22,789Gross profit $ 9,215Operating expenses 8,459Operating income $ 756
$756$32,004
= 2.4%
Operating Income PercentOperating Income Percent
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The company’s operating income percentage dropped from 2.4% to
0.6%, then recovered back to 2.7%.
The company’s operating income percentage dropped from 2.4% to
0.6%, then recovered back to 2.7%.
Operating Income PercentOperating Income Percent
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This recovery was attributed to lower catalog and marketing costs,
lower telemarketing costs, and a shift from development to
maintenance of JCPenney.com.
This recovery was attributed to lower catalog and marketing costs,
lower telemarketing costs, and a shift from development to