CHAPTER 5 MERCHANDISE OPERATIONS TYPES OF BUSINESS SERVICE

CHAPTER 5 MERCHANDISE OPERATIONS

TYPES OF BUSINESS • SERVICE, E. G. , MASSAGE PARLOR • MERCHANDISE, E. G. , 7 -11 • COMBINATION, E. G. , AUTO REPAIR

MERCHANDISE OPERATION • BUY MERCHANDISE -- + INVENTORY - CASH • SELL MERCHANDISE -- - INVENTORY -- BILLS CUSTOMER (+ ACCOUNTS RECEIVABLE) • GETS CASH + CASH - ACCOUNTS RECEIVABLE

WHEN DOES PURCHASE OF INVENTORY OCCUR • FOB, SHIPPING POINT. WHEN SHIPPED AND BUYER PAYS FREIGHT • FOB, DESTINATION. WHEN RECEIVED AND SELLER PAY FREIGHT • PRACTICAL SOLUTION: RECORED AS PURCHASE WHEN RECEIVED.

CARDINAL RULE • WHAT YOU HAD IN THE BEGINNING + WHAT YOU PUT IN, IS STILL THERE OR IT IS GONE

COST OF GOODS SOLD • BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY = COST OF GOODS SOLD • COST OF GOODS SOLD IS THE COST OF THE GOODS SOLD

PERPETUAL INVENTORY SYSTEM • • • PURCHASE GOODS FOR 700 INVENTORY ACCOUNTS PAYABLE 700 SELL GOODS FOR 1, 000 THAT COST 700 ACCTS. REC. SALES Cof. GS INVENTORY 1, 000 700

PERIODIC INVENTORY SYSTEM • • • PURCHASE GOODS FOR 700 PURCHASES ACCOUNTS PAYABLE 700 SELL GOODS FOR 1, 000 THAT COST 700 ACCTS. REC. SALES 1, 000

PHYSICAL INVENTORY • PERIODICALLY, PHYSICALLY COUNT THE INVENTORY AND ADJUST • EVEN IF YOU USE A PERPETUAL INVENTORY SYSTEM, YOU SHOULD PHYSICALLY COUNT TO BE SURE THAT THE RECORDS ARE CURRENT

FREIGHT COST • IF FOB SHIPPING POINT, NO EFFECT • IF FOB DESTINATION, ADD TO COST OF GOODS IN INVENTORY • PRACTICAL TREATMENT OF FREIGHT IN • ADD TO COST OF GOODS SOLD

PURCHASE RETURNS AND ALLOWANCES • RETURNS --- REVERSE PURCHASE • TRADE DISCOUNT ---- RECORD PURCHASE NET OF DISCOUNT • CASH DISCOUNT [DISCUSS LATER]

RECORDING SALES • • SALES ACCTS. RECEIVABLE CASH 1, 000

SALES ALLOWANCES CUSTOMER GETS A DISCOUNT • ACCTS. REC. • 950 SALES 950 • OR • ACCTS. REC. SALES ALLOW. • 950 50 SALES 1, 000

SALES RETURNS • AT SALE • ACCTS. REC. 1, 000 • RETURN GOODS • ACCTS. REC. • 75 • OR ACCTS. REC. 75 SALES 1, 000 SALES RETURNS 75 SALES 75

MERCHANDISE RETURNED • PUT BACK INTO INVENTORY • INVENTORY COST OF GOODS SOLD • 700 • • • IF NOT PUT BACK INTO INVENTORY COST OF GOODS RETURNED Cof. GS 700 OR NOTHING

CASH DISCOUNTS • OFFER A DISCOUNT IF ACCOUNT IS PAID EARLY, E. G. , 2/10; N/30 • PAYMENT IS DUE IN 30 DAYS BUT IF CUSTOMER PAYS WITHIN 10 DAYS OF INVOICE DATE, CUSTOMER PAYS 2% LESS THAN THE INVOICE AMOUNT

MANAGEMENT ASIDE • IF DISCOUNT IS AVAILABLE • (1) HOW MANY DAYS EARLY? E. G. , 2/10; N/30 IS 20 DAYS EARLY • (2) DIVIDE INTO THE NUMBER OF DAYS IN THE YEAR (MAKE IT EASY, USE 360) • 360 18 • 20 • MULTIPLY BY RATE 18 X 2% 36%, ANNUAL RATE

ACCOUNTING FOR CASH DISCOUNTS ON PURCHASES • MAKE THB 1, 000 PURCHASE WITH 2/10; N/30 DISCOUNT AVAILABLE • THEORETICALLY, AMOUNT OWED IS WHAT COULD BE PAID IN CASH • PURCHASE ACCTS. PAY. • 980 • IF PAID WITHIN DISCOUNT PERIOD • ACCTS. PAY CASH • 980 • IF PAID AFTER DISCOUNT PERIOD • ACCTS. PAY DISCOUNTS LOST CASH • 980 20 1, 000

PRACTICALLY • • • RECORD AT INVOICE PRICE PURCHASE ACCTS. PAY. 1, 000 IF PAID WITHIN DISCOUNT PERIOD ACCTS. PAY. DISCOUNTS EARNED CASH 1, 000 20 980 IF PAID AFTER DISCOUNT PERIOD ACCTS. PAY. CASH 1, 000

COSTING INVENTORY • THEORETICALLY, INVENTORY SHOULD BE COSTED AT IT’S NET (AFTER DISCOUNT) COST • LIKE FREIGHT IN, IT’S NOT WORTH THE EFFORT AND • MANAGEMENT WOULD RATHER SHOW A GAIN FROM PAYING EARLY THAN A LOSS FROM PAYING LATE BUT • FROM A MANAGEMENT STANDPOINT, DISCOUNTS EARNED IS USELESS INFORMATION

INCOME STATEMENT ANALYSIS • IF THE MULTIPLE STEP INCOME STATEMENT IS PRESENTED, THEN ONE CAN EVALUATE MORE INFORMATION • TWO EVALUATION STATISTICS THAT ARE VALUABLE ARE: • GROSS PROFIT MARGIN GROSS PROFIT/ SALES • PROFIT MARGIN NET INCOME/ SALES