6 1 Chapter 6 Merchandising Activities Mc GrawHillIrwin

3. Cash of se se ha di rc an Pu ch er m C

6 -3 Comparing Merchandising Activities with Manufacturing Activities Purchase inventory in ready-to-sell condition. Merchandising

Income Statement of a Merchandising Company 6 -4 Cost of goods sold represents the

6 -5 Two Approaches Used in Accounting for Merchandise Inventories Perpetual Inventory System Mc.

6 -6 Perpetual vs. Periodic Inventory Systems 09/05, Worley Co. purchased 100 laser lights

6 -7 Perpetual Inventory Systems Taking a Physical Inventory In order to ensure the

6 -8 Taking a Physical Inventory Reasonable amounts of inventory shrinkage are viewed as

6 -9 Periodic Inventory system Computing Cost of Goods Sold The accounting records of

Creating a Cost of Goods Sold Account 6 -10 Now, Party Supply must create

Creating a Cost of Goods Sold Account 6 -11 Now, Party Supply must record

6 -12 Selecting an Inventory System Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc.

6 -13 Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount Mc. Graw-Hill/Irwin

6 -14 Recording Purchases at Net Cost Purchases are recorded at their net amounts.

6 -15 Recording Purchases at Net Cost On July 6, Play Clothes purchased $4,

6 -16 Recording Purchases at Net Cost On July 15, Play Clothes pays the

6 -17 Recording Purchases at Net Cost Now, assume that Play Clothes waited until

Recording Purchases at Gross Invoice Price 6 -18 Purchases are recorded at their gross

Recording Purchases at Gross Invoice Price 6 -19 On July 6, Play Clothes purchased

Recording Purchases at Gross Invoice Price 6 -20 On July 15, Play Clothes pays

Recording Purchases at Gross Invoice Price 6 -21 Now, assume that Play Clothes waited

Returns of Unsatisfactory Merchandise 6 -22 On August 5, Play Clothes returned $500 of

6 -23 Transportation Costs on Purchases Transportation costs (freight-in) related to the acquisition of

6 -24 Transactions Relating to Sales Credit terms and merchandise returns affect the amount

6 -25 Sales On August 2, Kid’s Clothes sold $2, 000 of merchandise to

6 -26 Sales Returns and Allowances On August 5, Play Clothes returned $500 of

6 -27 Sales On July 6, Kid’s Clothes sold $4, 000 of merchandise to

6 -28 Sales Discounts On July 15, Kid’s Clothes receives the full amount due

6 -29 Sales Discounts Now, assume that it wasn’t until July 20 that Kid’s

6 -30 Delivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense,

6 -31 Accounting for Sales Taxes Businesses collect sales tax at the point of

6 -32 Financial Analysis Net Sales Gross Profit Margins • Trends over time •

Ethics, Fraud, and Corporate Governance 6 -33 Sales discounts and allowances are contra-revenue accounts.

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6 -1 Chapter 6 Merchandising Activities Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

3. Cash of se se ha di rc an Pu ch er m C 1. ol re lec ce ti iv on ab o le f t s he Operating Cycle of a Merchandising Company 6 -2 Accounts Receivable Mc. Graw-Hill/Irwin Inventory 2. Sale of merchandise on account © The Mc. Graw-Hill Companies, Inc. , 2008

6 -3 Comparing Merchandising Activities with Manufacturing Activities Purchase inventory in ready-to-sell condition. Merchandising Company Mc. Graw-Hill/Irwin Manufacture inventory and have a longer and more complex operating cycle. Manufacturing Company © The Mc. Graw-Hill Companies, Inc. , 2008

Income Statement of a Merchandising Company 6 -4 Cost of goods sold represents the expense of goods that are sold to customers. Gross profit is a useful means of measuring the profitability of sales transactions. © The Mc. Graw-Hill Companies, Inc. , 2008 Mc. Graw-Hill/Irwin

6 -5 Two Approaches Used in Accounting for Merchandise Inventories Perpetual Inventory System Mc. Graw-Hill/Irwin Periodic Inventory System © The Mc. Graw-Hill Companies, Inc. , 2008

6 -6 Perpetual vs. Periodic Inventory Systems 09/05, Worley Co. purchased 100 laser lights for resale for $30 per unit from Electronic City on account. 09/10, Worley Co. sold 10 laser lights for $50/unit on account to ABC Radios. 09/15, Worley Co. paid Electronic City $3, 000 for the September 5 purchase. 09/22, Worley Co. received $500 from ABC Radios as payment in full for their purchase on September 10. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -7 Perpetual Inventory Systems Taking a Physical Inventory In order to ensure the accuracy of their perpetual records, most businesses take a complete physical count of the merchandise on hand at least once a year. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -8 Taking a Physical Inventory Reasonable amounts of inventory shrinkage are viewed as a normal cost of doing business. Examples include breakage, spoilage and theft. On December 31, Worley Co. counts inventory. An inventory shortage of $2, 000 is discovered. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -9 Periodic Inventory system Computing Cost of Goods Sold The accounting records of Party Supply show the following: Inventory, Jan. 1, $ 14, 000; Purchases (during year) 130, 000; At December 31, Party Supply counted the merchandise on hand at $12, 000. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

Creating a Cost of Goods Sold Account 6 -10 Now, Party Supply must create the Cost of Goods Sold account. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

Creating a Cost of Goods Sold Account 6 -11 Now, Party Supply must record the ending inventory amount. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -12 Selecting an Inventory System Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -13 Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount Mc. Graw-Hill/Irwin # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due © The Mc. Graw-Hill Companies, Inc. , 2008

6 -14 Recording Purchases at Net Cost Purchases are recorded at their net amounts. Net Method Mc. Graw-Hill/Irwin Purchase Discounts Lost are recorded when payment is made outside the discount period. © The Mc. Graw-Hill Companies, Inc. , 2008

6 -15 Recording Purchases at Net Cost On July 6, Play Clothes purchased $4, 000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. Mc. Graw-Hill/Irwin $4, 000 ´ 98% = $3, 920 © The Mc. Graw-Hill Companies, Inc. , 2008

6 -16 Recording Purchases at Net Cost On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -17 Recording Purchases at Net Cost Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes. Nonoperating Expense Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

Recording Purchases at Gross Invoice Price 6 -18 Purchases are recorded at their gross amounts. Gross Method Mc. Graw-Hill/Irwin Purchase discounts taken are recorded when payment is made inside the discount period. © The Mc. Graw-Hill Companies, Inc. , 2008

Recording Purchases at Gross Invoice Price 6 -19 On July 6, Play Clothes purchased $4, 000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

Recording Purchases at Gross Invoice Price 6 -20 On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. Reduces Cost of Goods Sold Mc. Graw-Hill/Irwin $4, 000 ´ 98% = $3, 920 © The Mc. Graw-Hill Companies, Inc. , 2008

Recording Purchases at Gross Invoice Price 6 -21 Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

Returns of Unsatisfactory Merchandise 6 -22 On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes. Mc. Graw-Hill/Irwin $500 ´ 98% = $490 © The Mc. Graw-Hill Companies, Inc. , 2008

6 -23 Transportation Costs on Purchases Transportation costs (freight-in) related to the acquisition of assets are part of the cost of the asset being acquired. On July 6, Play Clothes paid $150 for the shipping of merchandise from Kid’s Clothes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -24 Transactions Relating to Sales Credit terms and merchandise returns affect the amount of revenue earned by the seller. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -25 Sales On August 2, Kid’s Clothes sold $2, 000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1, 000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -26 Sales Returns and Allowances On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Contra-revenue Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -27 Sales On July 6, Kid’s Clothes sold $4, 000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2, 000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -28 Sales Discounts On July 15, Kid’s Clothes receives the full amount due from Play Clothes from the July 6 sale. Prepare the journal entry for Kid’s Clothes. Contra-revenue Mc. Graw-Hill/Irwin $4, 000 ´ 98% = $3, 920 © The Mc. Graw-Hill Companies, Inc. , 2008

6 -29 Sales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes from the July 6 sale. Prepare the journal entry for Kid’s Clothes. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -30 Delivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -31 Accounting for Sales Taxes Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $1, 000 sale ´ 7% tax = $70 sales tax Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008

6 -32 Financial Analysis Net Sales Gross Profit Margins • Trends over time • Gross profit ¸ Net sales • Comparable store sales • Overall gross profit margin • Sales per square foot of selling space Mc. Graw-Hill/Irwin • Gross profit margins by department and products © The Mc. Graw-Hill Companies, Inc. , 2008

Ethics, Fraud, and Corporate Governance 6 -33 Sales discounts and allowances are contra-revenue accounts. Sales discounts and allowances reduce gross sales. As such, net income will be incorrect if discounts and allowances are not properly recorded. The pressure brought to bear on subordinates to implement fraudulent schemes developed by top management can often be intense. Top management can threaten employees with termination if they fail to participate in the fraud. Unfortunately, employees who acquiesce to such pressure face tremendous legal risks. Mc. Graw-Hill/Irwin © The Mc. Graw-Hill Companies, Inc. , 2008