Chapter 6 Merchandising Operations and the Multistep Income

Chapter 6 Merchandising Operations and the Multistep Income Statement Power. Point Author: Brandy Mackintosh, CA Copyright © 2016 by Mc. Graw-Hill Education

Learning Objective 6 -1 Distinguish between service and merchandising operations. 6 -2

Operating Cycles 6 -3

Operating Cycles 6 -4 (in thousands) (in millions)

Learning Objective 6 -2 Explain the differences between periodic and perpetual inventory systems. 6 -5

Inventory Systems Three accounts are particularly important to a merchandiser: - Inventory The merchandiser’s total cost of acquiring goods that it has not yet sold Sales Revenue Total selling price of all goods that the merchandiser did sell to customers Cost of Goods Sold Total cost of all goods that the merchandiser did sell to customers = Gross Profit 6 -6

Inventory Systems BI + P – EI = CGS or BI + P – CGS = EI $4, 800 + 10, 200 – 6, 000 = $9, 000 6 -7 $4, 800 + 10, 200 – 9, 000 = $6, 000

Periodic Inventory System A periodic inventory system updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period. BI + P – EI = CGS To determine how much inventory is on hand how much inventory has been sold, periodic systems require that inventory be physically counted by the employees at the end of the period. 6 -8

Perpetual Inventory System In a perpetual inventory system, the inventory records are updated “perpetually, ” that is, every time inventory is bought, sold, or returned. Perpetual systems often are combined with bar codes and optical scanners. 6 -9

Inventory Control 6 -10 Periodic Inventory System Perpetual Inventory System No Up-to-Date Records Continuous Tracking Can’t Estimate Shrinkage Can Estimate Shrinkage

Learning Objective 6 -3 Analyze purchase transactions under a perpetual inventory system. 6 -11

Recording Inventory Purchases We will now look at the accounting for inventory purchases, as well as transportation costs, purchase returns and allowances, and purchase discounts. We will record all inventory-related transactions in the Inventory account. 6 -12

Inventory Purchases Walmart receives $10, 500 of bikes purchased on account. 1 Analyze Assets Inventory 2 = +$10, 500 Accounts Payable + Stockholders’ Equity +$10, 500 Record Inventory Accounts Payable 6 -13 Liabilities 10, 500

Transportation Cost Walmart pays $400 cash to a trucker who delivers the $10, 500 of bikes to one of its stores. 1 Analyze Assets Cash Inventory 2 Liabilities + Stockholders’ Equity -$400 +$400 Record Inventory Cash 6 -14 = 400

Purchase Returns and Allowances Walmart returned some of the bikes to the supplier and received a $500 reduction in the balance owed. 1 Analyze Assets Inventory 2 -$500 Liabilities Accounts Payable + Stockholders’ Equity -$500 Record Accounts Payable Inventory 6 -15 = 500

Purchase Discounts Walmart’s bike purchase for $10, 500 had terms of 2/10, n/30. Recall that Walmart returned inventory costing $500 and received a $500 reduction in its Accounts Payable. Walmart paid within the discount period. 1 Analyze Assets Cash Inventory 2 -$9, 800 -$200 Liabilities + Stockholders’ Equity Accounts Payable -$10, 000 Record Accounts Payable Cash Inventory 6 -16 = 10, 000 9, 800 200

Summary of Inventory Transactions 6 -17

Learning Objective 6 -4 Analyze sales transactions under a perpetual inventory system. 6 -18

Recording Inventory Sales Merchandisers earn revenues by transferring control of merchandise to a customer, either for cash or on credit. For a merchandiser who is shipping goods to a customer, the transfer of control occurs at one of two possible times: 1. FOB shipping point —the sale is recorded when the goods leave the seller’s shipping department. 2. FOB destination —the sale is recorded when the goods reach their destination (the customer). 6 -19

Recording Inventory Sales Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system. Selling Price Cost 6 -20

Recording Inventory Sales Walmart sells two Schwinn mountain bikes at a selling price of $200 per bike, for a total of $400 cash. The bikes had previously been recorded in Walmart’s Inventory at a cost of $175 per bike, for a total cost of $350. 1 Analyze Assets Cash Inventory 2 +$400 -$350 Liabilities + Stockholders’ Equity Sales Revenue +$400 Cost of Goods Sold -$350 Record Cash Sales Revenue Cost of Goods Sold Inventory 6 -21 = 400 350

Sales Returns and Allowances When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance. 6 -22

Sales Returns and Allowances Suppose that after Walmart sold the two Schwinn mountain bikes, the customer returned one to Walmart. Assuming that the bike is still like new, Walmart would refund the $200 selling price to the customer and take the bike back into inventory. 1 Analyze Assets Cash Inventory 2 = Liabilities -$200 +$175 Stockholders’ Equity Sales Returns and Allowances (+x. R) Cost of Goods Sold -$200 +$175 Record Sales Returns & Allowances (+x. R) Cash Inventory Cost of Goods Sold 6 -23 + 200 175

Sales on Account and Sales Discounts Suppose Walmart’s warehouse store (Sam’s Club) sells printer paper on account to a local business for $1, 000 with payment terms of 2/10, n/30. The paper had cost Sam’s Club $700. 1 Analyze Assets Accounts Receivable+$1, 000 Inventory -$700 2 Liabilities + Stockholders’ Equity Sales Revenue +$1, 000 Cost of Goods Sold -$700 Record Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 6 -24 = 1, 000 700

Sales on Account and Sales Discounts To take advantage of this 2% discount, the customer must pay Walmart within 10 days. If the customer does so, it will deduct the $20 discount (2% $1, 000) from the total owed ($1, 000), and then pay $980 to Walmart. 1 Analyze Assets = Cash +$980 Accounts Receivable -$1, 000 2 Liabilities + Stockholders’ Equity Sales Discounts (+x. R) Record 980 20 Cash Sales Discounts (+x. R) Accounts Receivable 1, 000 (2% × $1, 000) 6 -25 -$20

Summary of Sales-Related Transactions The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts. 6 -26

Learning Objective 6 -5 Prepare and analyze a merchandiser’s multistep income statement. 6 -27

Multistep Income Statement 6 -28

Gross Profit Analysis Gross Profit = × 100 Profit % Net Sales 6 -29

Comparing Gross Profit Percentages 6 -30

Supplement 6 A Recording Inventory Transactions in a Periodic System Copyright © 2016 by Mc. Graw-Hill Education

Learning Objective 6 -S 1 Record inventory transactions in a periodic system. 6 -32

Recording Inventory Transactions in a Periodic System An electronics retailer stocks and sells just one item and the following events occurred: We will record these events assuming the company uses a periodic inventory system and then compare the periodic inventory system to a perpetual inventory system. 6 -33

Recording Inventory Transactions in a Periodic System Periodic Inventory System 6 -34 Perpetual Inventory System

Recording Inventory Transactions in a Periodic System Periodic Inventory System BI + P – EI = CGS End-of-year adjustment entries are not required using a perpetual inventory system. 6 -35

Recording Inventory Transactions in a Periodic System Summary of the Effects on the Accounting Equation 6 -36

Chapter 6 Solved Exercises M 6 -2, M 6 -16, E 6 -3, E 6 -5, E 6 -13, E 6 -20 Copyright © 2016 by Mc. Graw-Hill Education

M 6 -2 Calculating Shrinkage in a Perpetual Inventory System Corey’s Campus Store has $4, 000 of inventory on hand at the beginning of the month. During the month, the company buys $41, 000 of merchandise and sells merchandise that had cost $30, 000. At the end of the month, $13, 000 of inventory is on hand. How much shrinkage occurred during the month? Beginning inventory Purchases Cost of Goods Sold Ending balance Inventory count Shrinkage 6 -38 $ 4, 000 +41, 000 -30, 000 15, 000 -13, 000 $ 2, 000

M 6 -16 Interpreting Changes in Gross Profit Percentage Luxottica Group, the Italian company that sells Ray Ban and Oakley sunglasses, reported net sales of € 7. 1 billion in 2012 and € 6. 2 billion in 2011. Gross profit increased from € 4. 1 billion in 2011 to € 4. 7 billion in 2012. Was the increase in gross profit caused by (a) an increase in gross profit per sale, (b) an increase in sales volume, or (c) a combination of (a) and (b)? (in billions of euro) Net Sales Cost of Goods Sold Gross Profit Percentage 6 -39 2012 7. 1 2. 4 4. 7 2011 6. 2 2. 1 4. 1 66. 2% 66. 1%

E 6 -3 Identifying Shrinkage and Other Missing Inventory Information Calculate the missing information for each of the following independent cases: Beg. Inventory Purchases A $100 $700 $300 B 200 800 C 150 D 260 500 ? 600 Case 6 -40 Cost of Goods Sold Ending Inventory (perpetual) Ending Inventory (As Counted) $420 850 ? $500 ? 150 $80 ? ? 0 200 450 650 210 440 ? 200 10 ? 10 Shrinkage

E 6 -5 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for each of the following independent cases. 6 -41

E 6 -5 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for each of the following independent cases. Sales Revenue Beginning Inventory Purchases A $700 $100 $800 B 900 200 C 600 ? D E Case 6 -42 Cost of Goods Available Cost of Goods Sold Cost of Ending Inventory Gross Profit 850 ? 600$? 150 400$? 50? 500 ? 200 300 400 900 ? 950 ? 650 250 500 ? 450? 150 ? 500 800 900 ? 1, 000 ? 100 400 ? 800 300 ? 600 1, 000 50 900 $300

E 6 -13 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts Using the information in E 6 -12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system. Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to Spyder. Corp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc. Feb. 2 Collected cash due from Spyder. Corp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30. Jan. 6 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 6 -43 100 70 70

E 6 -13 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts Using the information in E 6 -12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system. Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to Spyder. Corp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc. Feb. 2 Collected cash due from Spyder. Corp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30. Jan. 6 6 -44 Accounts Receivable Sales Revenue 80 Cost of Goods Sold Inventory 60 80 60

E 6 -13 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts Using the information in E 6 -12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system. Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to Spyder. Corp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc. Feb. 2 Collected cash due from Spyder. Corp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30. Jan. 14 Cash ($100 x 98%) Sales Discounts ($100 x 2%) Accounts Receivable 6 -45 98 2 100

E 6 -13 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts Using the information in E 6 -12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system. Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to Spyder. Corp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc. Feb. 2 Collected cash due from Spyder. Corp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30. Feb. 2 Cash 80 Accounts Receivable 6 -46 80

E 6 -13 Recording Journal Entries for Net Sales with Credit Sales and Sales Discounts Using the information in E 6 -12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system. Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to Spyder. Corp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc. Feb. 2 Collected cash due from Spyder. Corp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30. Feb. 28 Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 6 -47 50 50 30 30

E 6 -20 Inferring Missing Amounts Based on Income Statement Relationships Supply the missing dollar amounts for the income statement of Williamson Company for each of the following independent cases: Sales Revenue Sales Returns and Allowances Net Sales Cost of Goods Sold Gross Profit 6 -48 Case A Case B Case C $ 8, 000 150 7, 850 5, 750 $ 2, 100 $ 6, 000 5, 500 4, 050 $ 1, 450 $ 6, 195 275 5, 920 5, 400 $ 520

End of Chapter 6 6 -49