Chapter 5 Accounting for Merchandising Businesses Three Major

Chapter 5 Accounting for Merchandising Businesses

Three Major Types of Businesses • Service – accountants, attorneys, physicians • Merchandising – Wal-Mart, Safeway, The Gap • Manufacturing – General Motors, 3 M, Reynolds Metals

Accounting for Merchandising Operations Operating cycles Inventory systems— perpetual and periodic Recording Purchases of Merchandise Recording Sales of Merchandise Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions Sales returns and allowances Sales discounts Completing the Accounting Cycle Adjusting entries Closing entries Summary of merchandising entries Forms of Financial Statements Multiple-step income statement Single-step income statement Classified balance sheet Determining cost of goods sold under a periodic system

Operating Cycle of a Merchandising Business Purchase and Cash Sale Purchase and Sale on Account Cash Accounts Receivable Inventory

Income Statements Service Co. Income Statement Year ended June 30, 20 xx Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx Merchandising Co. Income Statement Year ended June 30, 20 xx Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net income $ xx

Income Statement Formats Single Step with details Multi-step with details Single Step condensed Multi-step condensed Let’s look at examples…. .

Income Statement Formats Multi-step with details Net Sales Less: Cost of goods sold Gross Profit Margin Operating Expenses: Selling: Sales Salaries 8 Advertising 2 Total Selling 10 Administrative: Admin. Salaries 3 Building Rent 8 Total Adm. Exp. 11 Total Operating Exp. Operating Income Non-Operating Rev. (Exp. ) Interest Expense Income before tax Income Tax expense 3 Net Income 100 60 40 Multi-step: condensed Net Sales 100 Less: Cost of goods Sold 60 Gross Profit Margin 40 Operating Expenses: Selling Expenses 10 Administrative Exp. 11 Total Operating Exp. 21 Operating Income 19 Non-Operating Rev. (Exp. ) Interest Expense (1) 21 18 19 Income before tax Income Tax expense 3 (1) Net Income 15 18 15

Income Statement Formats Single-step with details Net Sales Less Expenses: Cost of goods sold Sales Salaries Advertising Admin. Salaries Building Rent Interest Expense Income Tax Expense Total Expenses Net Income 100 60 8 2 3 8 1 3 85 15 Single-step: condensed Net Sales 100 Less Expenses: Cost of goods sold 60 Selling 10 Administrative 11 Interest Expense 1 Income Tax Expense 3 Total Expenses 85 Net Income 15 When using the Condensed form for either multi- or single-step, if there isn’t enough information to separate the expenses into Selling & Administrative categories, list their sum as “Operating Expenses”.

General Ledger Accounts (control account) Although general ledger accounts provide useful information, they do not provide much of the detailed information needed in the daily business operations. Who owes us money?

Subsidiary Ledgers: A Source of Needed Details Controlling Account Subsidiary Account

Two Approaches Used in Accounting for Merchandise Transactions Perpetual Inventory System Periodic Inventory System

Periodic Inventory Systems • The ending inventory is determined at the end of the period by taking a physical count of the goods remaining on hand. • Cost of goods sold is calculated at the end of the accounting period by subtracting the ending inventory (determined from the physical count) from the Cost of Goods Available for Sale. Beginning Inventory $ 400 + Purchases, net 2000 = Goods Available for Sale 2400 - Ending Inv. (from count) 500 = Cost of Goods Sold $1900

The Inventory Subsidiary Ledger At the end of the period, management compares the physical inventory count with the inventory ledger to determine inventory shrinkage.

Selected transactions comparing the PERPETUAL vs. PERIODIC Inventory Systems

Selected transactions comparing PERPETUAL vs. PERIODIC Inventory Systems – Cont’d Use a Yr. -end inventory count to determine the inventory adjustment.

Use the Cost of Goods Sold schedule to calculate the costtransactions of the units that are Selected comparing PERPETUAL “gone” and ASSUMED to have been sold. Could PERIODIC some of the units actually Inventory Systems – Cont’d have been lost, stolen, or thrown away? Begin. Inventory $ 0 + Purchase $ 4000 - Purchase Returns ( 200) - Purchase Discounts ( 76) + Transportation In 551 Purchases, net 4275 Cost of Goods Avail. for Sale 4275 Less: Ending Inventory ( 1575) Cost of Goods Sold $2700 A Yr-end count shows 350 units (at a cost of $4. 50 each) still in stock =$1575 vs. Ending Inventory $1575 Less: Begin. Inv. 0 Add to Inv. account $1575

Merchandising Operations Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business. Equals Gross Profit Cost of goods sold is the total cost of merchandise sold during the period. Less Operating Expenses Equals Net Income (Loss)

Net Sales (sometimes called “Gross Sales”) Minus: Sales Returns and Allowances Minus: Sales Discounts (often given to credit customers who pay the seller quickly) = Net Sales

Cost of Goods Sold What is included in the “net” cost of purchases? Beginning inventory Add: Purchases (net) Cost of Goods Available for Sale Deduct: Ending inventory Cost of goods sold Cost of Goods Available for Sale expresses the total cost of what has been available for sale throughout a given time period.

Net Purchases Beginning inventory Plus : Purchases Minus : Purchase Returns & Allowances Minus : Purchase Discounts Plus : Transportation-in Net Purchases = Cost of Goods available for sale Minus : Ending inventory = Cost of goods sold “Cost of Goods Available for Sale” is the total cost of what has been available for sale throughout a given time period.

Sales Discounts The terms for when payments for merchandise are to be made are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.

Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due

Sales Discounts Credit Terms If invoice is paid within 10 days of invoice date $1, 470 paid (less 2% as a cash discount) Invoice for $1, 500 Terms: 2/10, n/30

Sales Discounts Credit Terms Invoice for $1, 500 Terms: 2/10, n/30 If invoice is NOT paid within 10 days of invoice date $1, 500 PAID

Sales Returns and Allowances Merchandise that is returned to the vendor is referred to as a sales return. If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.

Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Accounts Receivable—Burton Co. Sales 7, 500 Cost of Merchandise Sold Merchandise Inventory 4, 500 7, 500 4, 500 Burton Company (Buyer) Merchandise Inventory. Accounts Payable—Scully Co. 7, 500 July 1. Scully Company sold merchandise on account to Burton Co. , $7, 500, The cost of the merchandise sold was $4, 500.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) No entry. Burton Company (Buyer) Merchandise Inventory Cash 150 July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Accounts Receivable—Burton Co. Sales 5, 000 Cost of Merchandise Sold Merchandise Inventory 3, 500 5, 000 3, 500 Burton Company (Buyer) Merchandise Inventory. Accounts Payable—Scully Co. 5, 000 July 5. Scully Company sold merchandise on account to Burton Co. , $5, 000, The cost of the merchandise sold was $3, 500.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Transportation Out Cash 250 Burton Company (Buyer) No entry. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Company on July 5.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Sales Returns and Allowances Accounts Receivable—Burton Co. Merchandise Inventory Cost of Merchandise Sold 1, 000 700 Burton Company (Buyer) Accounts Payable—Scully Co. Merchandise Inventory 1, 000 July 13. Scully Company issued Burton Company a credit memorandum for $1, 000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Cash Accounts Receivable—Burton Co. 4, 000 Burton Company (Buyer) Accounts Payable—Scully Co. Cash 4, 000 July 15. Scully Company received payment from Burton Company for purchase of July 5.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Accounts Receivable—Burton Co. Sales Cost of Merchandise Sold Merchandise Inventory 12, 500 7, 200 Burton Company (Buyer) Merchandise Inventory Accounts Payable—Scully Co. 12, 500 July 18. Scully Company sold merchandise on account to Burton Company, $12, 000, paid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7, 200.

Illustration of Accounting for Merchandise Transactions Scully Company (Seller) Cash Sales Discounts Accounts Receivable—Burton Co. 12, 260 240 12, 500 Burton Company (Buyer) Accounts Payable—Scully Co. Merchandise Inventory (Discounts) Cash 12, 500 July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12, 000). 240 12, 260

Merchandise Inventory Shrinkage • Net Solutions inventory records indicate that $63, 950 of merchandise should be available for sale on December 31, 2007. • The physical count reveals that only $62, 150 is actually available.

Merchandise Inventory Shrinkage Adjusting Entry Dec. 31 Cost of Merchandise Sold 1 800 00 Merchandise Inventory records $63, 950 Inventory count 62, 150 Inventory shortage $ 1, 800 1 800 00

Recording Purchases of Merchandise Information related to Steffens Co. is presented below. Prepare the journal entry to record the transaction under a perpetual inventory system. 1. On April 5, purchased merchandise from Bryant Company for $25, 000 terms 2/10, net/30 April 5 Merchandise inventory Accounts payable 25, 000

Recording Purchases of Merchandise Prepare the journal entry to record the transaction under a perpetual inventory system. 2. On April 6, paid freight costs of $900 on merchandise purchased from Bryant. April 6 Merchandise inventory Cash 900

Recording Purchases of Merchandise Not all purchases increase Merchandise Inventory. Prepare the journal entry to record the transaction under a perpetual inventory system. 3. On April 7, purchased equipment on account for $26, 000. April 7 Equipment Accounts payable 26, 000

Recording Purchases of Merchandise Prepare the journal entry to record the transaction under a perpetual inventory system. 4. On April 8, returned damaged merchandise to Bryant Company and was granted a $4, 000 credit for returned merchandise. April 8 Accounts payable 4, 000 Merchandise inventory 4, 000

Recording Purchases of Merchandise Prepare the journal entry to record the transaction under a perpetual inventory system. 5. On April 15, paid the amount due to Bryant Company in full. (Discount = $25, 000 x 2% = $500) April 15 Accounts payable 25, 000 Merchandise inventory Cash 500 24, 500

Recording Purchases of Merchandise Prepare the journal entry to record the transaction under a perpetual inventory system. 5. On April 15, paid the amount due to Bryant Company in full. What entry would be made if the company failed to pay within 10 days? April 16 or later Accounts payable Cash 25, 000

Recording Sales of Merchandise Two Journal Entries to Record a Sale #1 #2 Cash or Accounts receivable Sales XXX Cost of goods sold Merchandise inventory XXX XXX Selling Price Cost

Recording Sales of Merchandise Presented are transactions related to Wheeler Company. 1. On December 3, Wheeler Company sold $500, 000 of merchandise to Hashmi Co. , terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $350, 000. 2. On December 8, Hashmi Co. was granted an allowance of $27, 000 for merchandise purchased on December 3. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.

Recording Sales of Merchandise Prepare the journal entries for Wheeler Company. 1. On December 3, Wheeler Company sold $500, 000 of merchandise to Hashmi Co. , terms 2/10, n/30. Cost of merchandise sold was $350, 000. Dec. 3 Accounts receivable Sales 500, 000 Cost of goods sold 350, 000 Merchandise inventory 350, 000

Recording Sales of Merchandise Prepare the journal entries for Wheeler Company. 2. On December 8, Hashmi Co. was granted an allowance of $27, 000 for merchandise purchased on December 3. Dec. 8 Sales returns and allowances Accounts receivable 27, 000

Recording Sales of Merchandise Prepare the journal entries for Wheeler Company. 2. Variation On Dec. 8, Hashmi Co. returned merchandise for credit of $27, 000. The original cost of the merchandise to Wheeler was $19, 800. Dec. 8 Sales returns and allowances Accounts receivable 27, 000 Merchandise inventory Cost of goods sold 19, 800

Recording Sales of Merchandise Prepare the journal entries for Wheeler Company. 3. On December 13, Wheeler Company received the balance due from Hashmi Co. Dec. 13 Cash Sales discounts Accounts receivable * ($473, 000 – $9, 460) ** [($500, 000 – $27, 000) X 2%] *** ($500, 000 – $27, 000) 463, 540 * 9, 460 ** 473, 000 ***