Chapter 5 Accounting for Merchandising Operations Chapter 5

Chapter 5 Accounting for Merchandising Operations Chapter 5 -1 Accounting Principles, Ninth Edition

READ CH 5 & DO: ONLINE QUESTIONS on website DUE 11/8 Chapter 5 -2

l Chapter 5 -3 GOAL: TO UNDERSTAND THE DIFFERENCE BETWEEN NET INCOME/LOSS FOR A SERVICE COMPANY & A MERCHANDISE COMPANY

l WHAT ACCOUNTS DO YOU CURRENTLY USE TO CALCULATE NET INCOME/LOSS? l SERVICE REVENUE & EXPENSES NOW YOU WILL LEARN A NEW WAY l Chapter 5 -4

Merchandising Operations Merchandising (sales) Companies Buy and Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as _____. Chapter 5 -5

Merchandising Operations- # 5 IN ch 5 OUTLINE Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business. Equals __________ sold (COGS) is the total cost of merchandise sold during the period. Chapter 5 -6 Gross Profit Illustration 5 -1 Less Operating Expenses Equals Net Income (Loss) SO 1 Identify the differences between service and merchandising companies.

l BE 5 -1 HINT: LOOK AT # 5 from CH 5 OUTLINE FOR HOW TO CALCULATE NET INCOME. PRACTICE Sales - $75, 000 $108, 000 ? Chapter 5 -7 Cost of Goods Sold ? $70, 000 $71, 900 = Gross Profit - $30, 000 ? $79, 600 Operating Expenses = Net Income ? ? $39, 500 Cost of goods sold = $45, 000 ($75, 000 – $30, 000). Operating expenses = $19, 200 ($30, 000 – $10, 800). Gross profit = $38, 000 ($108, 000 – $70, 000). Operating expenses = $8, 500 ($38, 000 – $29, 500). Sales = $151, 500 ($71, 900 + $79, 600). Net income = $40, 100 ($79, 600 – $39, 500). $10, 800 $29, 500 ?

Periodic Inventory System OPEN CH 5 COGS CHEAT SHEET 1. 2. 3. 4. 5. 6. 7. 8. Take Beginning inventory Add Purchases Subtract Purchase Discounts Subtract Purchase Returns & Allowances This = Net Purchases Add Freight-in This = Cost of goods purchases (available for sale) Subtract Ending Inventory available for sale to get the Cost of goods sold Chapter 5 -10 Calculation of Cost of Goods Sold $31 6, 000

Calculation of Gross Profit Calculation: Take Sales Subtract Sales Returns Subtract Sales Discounts This Equals: Net sales Subtract COGS This Equals: Gross profit Chapter 5 -11 Calculating the Gross profit rate

Compute cost of goods sold and gross profit. OPEN CH 5 COGS SHEET l l Assume that Alshare Company has these account balances: l Purchases $450, 000 l Purchase Returns and Allowances $11, 000 l Purchase Discounts $8, 000 l Freight-in $16, 000. l Beginning inventory of $60, 000 l Ending inventory of $90, 000 l Net sales of $630, 000. Determine the amounts to be reported for cost of goods sold Chapter 5 -12

Compute cost of goods sold and gross profit. OPEN CH 5 COGS SHEET l l Assume that lshare Company has these account balances: l COGS: $417, 000 l Net sales: $630, 000 Determine the amounts to be reported for gross profit & the gross profit rate Chapter 5 -13

YOUR TURN: Compute cost of goods sold and gross profit. OPEN CH 5 COGS SHEET l Assume that Alshare Company has these account balances: l l l l Chapter 5 -14 Purchases $550, 000 Purchase Returns and Allowances $10, 000 Purchase Discounts $20, 000 Freight-in $18, 000. Beginning inventory of $65, 000 Ending inventory of $95, 000 Net sales of $650, 000. Determine the amounts to be reported for cost of goods sold, gross profit & the gross profit rate

Use the COGS cheat sheet & calculate the actual gross profit l Once this is done- you can calculate the gross profit rate HINT: NOT EVERY # IS USED & you will need to now calculate NET SALES. Presented below is information for Jorge Company: l Cost of goods sold $212, 000 l Rent expense $ 32, 000 l Freight-out 7, 000 l Sales discounts 8, 000 l Insurance expense 6, 000 l Sales returns and allowances 13, 000 l Salaries and wages expense 58, 000 l Sales revenue 370, 000 l Chapter 5 -15

ONE MORE: Use the COGS cheat sheet & ONLY calculate the actual gross profit & the gross profit rate l Cost of goods sold $230, 000 l Advertising expense $32, 000 l Freight-out $17, 000 l Sales discounts $8, 000 l Insurance expense $6, 000 l Sales returns and allowances $13, 000 l Salaries and wages expense $58, 000 l Sales revenue $370, 000 Chapter 5 -16

Recording Sales of Merchandise OPEN MERCHANDISE INVENTORY EXAMPLES OPEN CH 5 MERCHANDISE Journal entries on website Chapter 5 -17 SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Purchases of Merchandise Freight Costs – Terms of Sale Illustration 5 -6 Seller places goods Free On Board (FOB) the carrier, and buyer pays freight costs. Seller places goods Free On Board (FOB) to the buyer’s place of business, and seller pays freight costs. Chapter 5 -18 Freight costs incurred by the seller are an operating expense.

Recording Purchases of Merchandise #12 in Outline Purchase Discounts Terms- If you see the word “TERMS” it = ON ACCOUNT 2/10, n/30 2% discount if paid within 10 days, otherwise net amount due within 30 days. Chapter 5 -19 1/10 EOM 1% discount if paid within first 10 days of next month. n/10 EOM Net amount due within the first 10 days of the next month. SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Purchases of Merchandise Purchase Discounts Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty. ” 2% cash discount if payment is made within 10 days. Chapter 5 -20 SO 2 Explain the recording of purchases under a perpetual inventory system.

PURCHASE DISCOUNTS EX 1: You purchase $800 in equipment for your business. The seller give you “terms” of a 2% discount if you pay them within 10 days or full payment with no discount in 30 days. (TERMS 2/10, n/30). How much do you owe if you pay in 10 days? 30 days? l If you pay with in 10 days, the discount would be $16 (2% of $800) which means you pay $784. l If you pay in 30 days, you owe $800 (no discount) EX 2: You purchase supplies for $10, 000 with the credit Terms 1/10, n/30. How much do you owe if you pay in 10 days? 30 days? l If you pay with in 10 days, the discount would be $100 (1% of $10, 000) which means you pay $9, 900. l If you pay in 30 days, you owe 10, 000 (no discount) Chapter 5 -21

Recording Sales of Merchandise OPEN MERCHANDISE INVENTORY EXAMPLES Two Journal Entries to Record a Sale- #16 in Outline #1 Cash or Accounts receivable Sales XXX #2 Cost of goods sold XXX Merchandise inventory Chapter 5 -22 XXX Selling Price XXX Cost SO 3 Explain the recording of sales revenues under a perpetual inventory system.

EXAMPLE: l ABC sells merchandise on account to DEF Corp. The selling price of the goods is $500, and the cost of the goods is $200. l Journalize the transaction for the SALE of the merchandise. Chapter 5 -23

Recording Sales of Merchandise On December 3, YOU sold $500, 000 of merchandise to ABC Co. , terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was $350, 000. Journalize the Sale. Dec. 3 Accounts receivable 500, 000 Sales 500, 000 Cost of goods sold 350, 000 Merchandise inventory 350, 000 Chapter 5 -24

Recording Sales of Merchandise under Perpetual System On December 8, YOU granted an allowance of $27, 000 for merchandise purchased by ABC on December 3. Dec. 8 Chapter 5 -25 Sales returns and allowances Accounts receivable 27, 000 SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Sales of Merchandise under Perpetual System Variation On Dec. 8, ABC Co. returned merchandise to YOU for credit of $27, 000. The original cost of the merchandise to Wheeler was $19, 800. Dec. 8 Sales returns and allowances Accounts receivable Merchandise inventory Cost of goods sold Chapter 5 -26 27, 000 19, 800 SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Recording Sales of Merchandise under Perpetual System On December 13, YOU received the balance due from ABC Co. NOTE: The Original purchase on 12/3 was for $500 k (terms 2/10) they returned $27 k. Dec. 13 Cash 463, 540 * Sales discounts 9, 460 Accounts receivable ** * ($473, 000 – $9, 460) ** [($500, 000 – $27, 000) X 2%] 473, 000 *** ($500, 000 – $27, 000) Chapter 5 -27 SO 3 Explain the recording of sales revenues under a perpetual inventory system.

SALES OF MERCHANDISE PRACTICE: l ABC sells merchandise on account to DEF Corp. The selling price of the goods is $1500, and the cost of the goods is 30% of the sales price 1. Journalize the transaction for the SALE of the merchandise for ABC. 2. How much is the Gross Profit? Chapter 5 -28

Recording Purchases of Merchandise April 5 Merchandise inventory XXXX Accounts payable or CASH XXXX Chapter 5 -29 SO 2 Explain the recording of purchases under a perpetual inventory system.

Hollins Company buys (PURCHASES) merchandise on account from Gordon Company (SELLER). The selling price of the goods is $780, and the cost of the goods is 45% OF SALES PRICE. 1. Journalize the transaction on the books of the PURCHASE (HOLLINS) & SALE (GORDON) of the merchandise. HINT: USE MERCHANDISE INVENTORY EXAMPLES 2. Calculate Gross Profit for Gordon l Chapter 5 -30

Recording Purchases of Merchandise under Perpetual System- EXAMPLE On 4/5, You Purchased merchandise on account from Bryant Company for $25, 000 terms 2/10, net/30, FOB shipping point. April 5 Chapter 5 -31 Merchandise inventory Accounts payable 25, 000 SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Purchases of Merchandise On April 6, you paid freight costs of $900 on merchandise purchased from Bryant. April 6 Chapter 5 -32 Merchandise inventory Cash 900 SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Purchases of Merchandise On April 8, you returned damaged merchandise to Bryant Company and was granted a $4, 000 credit for returned merchandise. April 8 Chapter 5 -33 Accounts payable 4, 000 Merchandise inventory 4, 000 SO 2 Explain the recording of purchases under a perpetual inventory system.

Recording Purchases of Merchandise On April 15, you paid the $25, 000 amount due to Bryant Company in full. Remember the return of $4, 000 of merchandise. Purchase was made on 4/5, terms 2/10, net/30 (Discount = $21, 000 x 2% = $420) April 15 Accounts payable 21, 000 Cash 20, 580 Merchandise Inventory Chapter 5 -34 420 SO 2 Explain the recording of purchases under a perpetual inventory system.

Forms of Financial Statements Multiple-Step Income Statement Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and nonoperating activities. Chapter 5 -35 SO 5 Distinguish between a multiple-step and a single-step income statement.

Multiple. Step Illustration 5 -13 Key Items: Net sales Gross profit Operating expenses Nonoperating activities Net income Chapter 5 -36 SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms of Financial Statements Single-Step Income Statement 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. Chapter 5 -37 SO 5 Distinguish between a multiple-step and a single-step income statement.

Forms of Financial Statements Illustration 5 -14 Single. Step Chapter 5 -38 SO 5 Distinguish between a multiple-step and a single-step income statement.

PRACTICE 5 p-1 A You do 5 p-1 B (graded) & 5 p 8 A (groups of 2) Chapter 5 -39