5 Accounting for Merchandise Operations FINANCIAL ACCOUNTING 2

5 Accounting for Merchandise Operations FINANCIAL ACCOUNTING 2 ND EDITION BY DUCHAC, REEVE, & WARREN Power. Point Presentation by Gail B. Wright Professor of Accounting Bryant University © Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license. 1

LG 1 SERVICE VS. MERCHANDISING BUSINESS Service firms sell services Examples: Family Health Care, PC H&R Block Merchandising firms sell products Must buy products to sell Gross profit = Net sales – Cost of Goods Sold 2

LG 1 EXHIBIT 1 Service firm income statement 3

LG 1 EXHIBIT 2 Merchandising firm income statement 4

LG 2 MULTI-STEP INCOME STATEMENT Multi-step Isolates Cost of Goods Sold Subtracts CGS from Net sales to get Gross Profit Continued 5

LEARNING GOALS 3 Describe accounting for sale of merchandise. 6

LG 3 ENTRY 1/3: Cash Sale SCF BS IS 1/3 Cash R Sales 1, 800 Sold merchandise for cash Increases operating cash flow Increases assets, equity Increases revenue 7

LG 3 ENTRY 1/3: CMS SCF BS IS 1/3 CMS E 1, 200 Inventory 1, 200 Merchandise charged to expense (CMS) Has no effect on cash flow Decreases assets, equity on balance sheet Increases expense on income statement 8

LG 3 ENTRY 1/12: Credit Sale SCF BS IS 1/12 Acct Receivable R 1, 500 Sales 1, 500 Sale on account, 2/10, n/30 Has no effect on cash flows Increases assets, equity on balance sheet Increases revenue on income statement 9

LG 3 ENTRY 1/12: CMS SCF BS IS E 1/12 CMS 850 Inventory 850 Charged inventory to expense (CMS) Has no effect on cash flows Decreases assets, equity on balance sheet Increases expense on income statement 10

ENTRY 1/22: Discount SCF BS IS R 1/22 Cash 1, 470 Sales Discount Acct Receivable 30 1, 500 Received payment within discount period Increases operating cash flows Net decrease assets, decreases equity on balance sheet Click button to skip to purchase entries Decreases revenue on income statement 11

LG 3 ENTRY 1/13: Sales Returns SCF BS IS 1/13 Sales R&A R 2, 000 Acct Receivable 2, 000 Accepted sales returns, reduction of receivables No effect cash flows Decreases assets, equity on balance sheet Decreases revenue on income statement 12

LG 3 ENTRY 1/13: Inventory Returns SCF BS IS 1/13 Inventory E 1, 200 CMS 1, 200 Returned merchandise put back in inventory No effect cash flows Increases assets, equity on balance sheet Decreases expenses on income statement 13

LEARNING GOALS 4 Describe accounting for purchase of merchandise. 14

LG 4 ENTRY 1/6: Purchase SCF BS IS 1/6 Inventory 1, 800 Acct Payable 1, 800 Purchased inventory on account Has no effect on cash flows Increases assets, liabilities on balance sheet Has no effect on income statement 15

LG 4 ENTRY 1/21: Purchase Discounts SCF BS IS 1/21 Acct Payable 1, 800 Inventory Cash 18 1, 782 Paid account within discount period Decreases operating cash flow Decreases assets, liabilities on balance sheet No effect income statement 16

LG 4 ENTRY 2/5: No Discounts SCF BS IS 2/5 Acct Payable 1, 800 Cash 1, 800 Payment made after discount period Decreases operating cash flows Decreases assets, liabilities on balance sheet Click button to skip returns No effect on income statement 17

LG 4 ENTRY 1/19: Returning Inventory SCF BS IS 1/19 Acct Payable 5, 000 Inventory 5, 000 Returning merchandise inventory to vendor Has no effect on cash flows Decreases assets, liabilities on balance sheet Has no effect on income statement 18

LEARNING GOALS 5 Describe accounting for transportation costs, sales taxes. 19

LG 5 ENTRY 1/19 FOB: Shipping Point SCF BS IS 1/19 Inventory 2, 900 Acct Payable SCF BS IS 1/19 Inventory 2, 900 150 Cash 150 Inventory purchased FOB shipping point Decreases cash flows, operations from payment of shipping costs Increases assets, liabilities on balance sheet from purchase Click button to skip entry No effect income statement 20

LG 5 ENTRY 1/24: Delivery Costs SCF BS IS 1/24 Acct Receivable R SCF BS IS E SCF BS IS 4, 700 Sales 1/24 CMS 4, 700 2, 750 Inventory 1/24 Transportation costs E 2, 750 350 Cash 350 Sold and delivered merchandise Decrease operating cash flows from delivery Net increase assets, equity on balance sheet Net increase income on income statement 21

LG 8 INVENTORY MISSTATEMENTS When inventory is misstated – Income statement effects • Gross profit, net income equally misstated – Balance sheet effects • Total assets equally misstated • Equity equally misstated 22

LG 9 GROSS PROFIT RATIO Gross profit as a percent of sales Gross profit/Net Sales For $1 sales, X cents of gross profit, after covering cost of merchandise 23

LG 9 OPERATING PROFIT RATIO Operating profit as a percent of sales Operating Income/Net Sales For $1 sales, X cents of operating profit after covering operating expenses 24

LG 9 EXHIBIT 13 J. C. PENNEY Fiscal yr end GP as % of Sales Op Income as % of Sales SAKS 2002 2003 2004 38. 7% 37. 2% 35. 9% 37. 9% 5. 5% 3. 1% 2. 4% 3. 0% 25

"When we long for life without difficulties, remind us that oaks grow strong in contrary winds and diamonds are made under pressure. " - Peter Marshall 26