Chapter 6 Power Notes Accounting for Merchandising Businesses

Chapter 6 Power Notes Accounting for Merchandising Businesses Learning Objectives 1. Nature of Merchandising Business 2 a. Accounting for Purchases 2 b. Accounting for Sales C 6 2 c. Transportation Costs 2 d. Merchandise Transactions 3. Merchandising Chart of Accounts 4. Merchandising Income Statement 5. Merchandising Accounting Cycle 6. Financial Analysis and Interpretation C 6 - 1

Chapter 6 Power Notes Accounting for Merchandising Businesses Slide # Power Note Topics 3 6 8 13 25 27 34 • Nature of Merchandising Businesses • Inventory Costs and Relationships • Perpetual Inventory Systems • Merchandising Transactions • Merchandising Chart of Accounts • Merchandising Financial Statements • Ratio of Net Sales to Assets Note: To select a topic, type the slide # and press Enter. C 6 - 2

Merchandising and Inventory 4 Merchandising involves selling inventory 4 Inventory is usually an important asset 4 Inventory must be accounted for periodically or perpetually 4 Traditional periodic method is often being replaced by perpetual inventory accounting C 6 - 3

Income Statement Comparison Service Business Fees earned Operating expenses Net income $150, 000 120, 000 $ 30, 000 20% of revenues Merchandising Business Sales revenue Cost of mdse. sold Gross profit Operating expenses Net income $600, 000 450, 000 $150, 000 120, 000 $ 30, 000 5% of revenues C 6 - 4

Income Statement Comparison Service Business Fees earned Operating expenses Net income $150, 000 120, 000 $ 30, 000 20% of revenues Merchandising Business Sales revenue Cost of mdse. sold Gross profit Operating expenses Net income $600, 000 450, 000 $150, 000 120, 000 $ 30, 000 75% of revenues C 6 - 5

Inventory Costs and Relationships LIABILITIES Merchandise Inventory ASSETS OWNER’S EQUITY Net Income Cost of Mdse. Sold COSTS & EXPENSES REVENUES If merchandise inventory is. . . . overstated Cost of merchandise sold is. . . understated Gross profit and net income are. . . overstated Ending owner’s equity is. . overstated C 6 - 6

Inventory Costs and Relationships LIABILITIES Merchandise Inventory ASSETS OWNER’S EQUITY Net Income Cost of Mdse. Sold COSTS & EXPENSES REVENUES If merchandise inventory is. . . . understated Cost of merchandise sold is. . . overstated Gross profit and net income are. . . understated Ending owner’s equity is. . understated C 6 - 7

Advantages of Using Perpetual Inventory 4 Continuous determination of inventory value 4 Continuous determination of gross profit 4 Affordable with computers, scanners, and bar codes on most products 4 Perpetual inventory accounting provides management controls 4 Managers know which items are selling fastest and the profit margin on those items C 6 - 8

Perpetual Inventory System General Journal Description A General Ledger Debit Credit Mdse. Inventory Accts. Payable 5, 000 Mdse. Inventory A 5, 000 Cost of Mdse. Sold A Purchase on account B Return of merchandise In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. C 6 - 9

Perpetual Inventory System General Journal Description A B General Ledger Debit Credit Mdse. Inventory Accts. Payable 5, 000 Accts. Payable Mdse. Inventory 1, 000 Mdse. Inventory A 5, 000 1, 000 B Bal 4, 000 A Purchase on account B Return of merchandise C Sale of merchandise Cost of Mdse. Sold In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. C 6 - 10

Perpetual Inventory System General Journal Description A B C General Ledger Debit Credit Mdse. Inventory Accts. Payable 5, 000 Accts. Payable Mdse. Inventory 1, 000 Accts. Receivable Sales Mdse. Inventory A 5, 000 1, 000 B 2, 500 C Bal 1, 500 Cost of Mdse. Sold 3, 250 Cost of Mdse. Sold 2, 500 Mdse. Inventory A Purchase on account 2, 500 B Return of merchandise C Sale of merchandise C 2, 500 3, 250 In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. C 6 - 11

Perpetual Inventory System General Journal Description A B C General Ledger Debit Credit Mdse. Inventory Accts. Payable 5, 000 Accts. Payable Mdse. Inventory 1, 000 Accts. Receivable Sales Mdse. Inventory A 5, 000 1, 000 B 2, 500 C Bal 1, 500 Cost of Mdse. Sold 3, 250 Cost of Mdse. Sold 2, 500 Mdse. Inventory A Purchase on account 2, 500 B Return of merchandise C Sale of merchandise C 2, 500 3, 250 In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. C 6 - 12

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? No Full amount is due within 30 days of invoice date. C 6 - 13

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? No Full amount is due within 30 days of invoice date. Yes 2% of invoice amount is allowed as a cash discount. C 6 - 14

Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Yes 2% of invoice amount is allowed as a cash discount. No Full amount is due within 30 days of invoice date. Example: Merchandise was purchased for $1, 500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice $1, 500 Less 2% discount 30 Net cost paid $1, 470 C 6 - 15

Selling and Buying Merchandise Inventory Seller Description Accts. Receivable Sales Buyer Debit Credit 1, 500 Description Debit Credit Mdse. Inventory 1, 470 Accts. Payable 1, 470 Recorded at net cost $1, 500 - $30 (discount) Cost of Mdse. Sold 900 Mdse. Inventory 900 Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period. C 6 - 16

Selling and Buying Merchandise Inventory Seller Description Accts. Receivable Sales Buyer Debit Credit 1, 500 Description Debit Credit Mdse. Inventory 1, 470 Accts. Payable 1, 470 Recorded at net cost $1, 500 - $30 (discount) Cost of Mdse. Sold 900 Mdse. Inventory 900 Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Cash 1, 470 Accts. Payable 1, 470 Sales Discounts 30 Cash Accts. Receivable 1, 470 Jan 22. Payment was made within the discount period. 1, 500 C 6 - 17

Selling and Buying Merchandise Inventory Seller Description Accts. Receivable Sales Buyer Debit Credit 1, 500 Description Debit Credit Mdse. Inventory 1, 500 Accts. Payable 1, 500 Recorded at full cost Cost of Mdse. Sold 900 Mdse. Inventory 900 Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Cash 1, 470 Accts. Payable 1, 500 Sales Discounts 30 Mdse. Inventory 30 Accts. Receivable Cash Jan 22. Payment was made within the discount period. 1, 500 1, 470 C 6 - 18

Accounting for Merchandise Transactions Scully Company (Seller) Description Debit Credit Burton Co. (Buyer) Description Debit Credit Accts. Receivable 5, 000 Mdse. Inventory 5, 000 Sales 5, 000 Accts. Payable Cost of Mdse. Sold 3, 500 5, 000 Mdse. Inventory 3, 500 July 5. Scully Company sold merchandise on account to Burton Co. , $5, 000, terms FOB destination, n/30. The cost of the merchandise sold was $3, 500. C 6 - 19

Accounting for Merchandise Transactions Scully Company (Seller) Description Accts. Receivable Sales 5, 000 Cost of Mdse. Sold Mdse. Inventory 3, 500 Transportation Out Cash Debit Credit 5, 000 3, 500 250 Burton Co. (Buyer) Description Mdse. Inventory Accts. Payable 5, 000 Debit Credit 5, 000 No entry. July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5. C 6 - 20

Accounting for Merchandise Transactions Scully Company (Seller) Description Accts. Receivable Sales 5, 000 Cost of Mdse. Sold Mdse. Inventory 3, 500 Debit Credit 5, 000 Burton Co. (Buyer) Description Mdse. Inventory Accts. Payable 5, 000 Debit Credit 5, 000 3, 500 No entry. Transportation Out 250 Sales Ret. & Allow. 1, 000250 Cash Accts Receivable Accts. Payable 1, 000 Mdse. Inventory 700 Cost of Mdse. Sold July 13. Scully Company issued Burton Co. a credit memo for 700 merchandise returned, $1, 000. The merchandise cost was $700. C 6 - 21

Accounting for Merchandise Transactions Scully Company (Seller) Description Cash Debit Credit Burton Co. (Buyer) Description Debit Credit 4, 000 Accts. Payable Accts. Receivable Cash 4, 000 July 15. Scully Company received payment from Burton Co. for purchase of July 5. 4, 000 C 6 - 22

Accounting for Merchandise Transactions Scully Company (Seller) Description Debit Credit Burton Co. (Buyer) Description Cash 4, 000 Accts. Payable Accts. Receivable Cash 4, 000 Accts. Receivable 12, 500 Sales 12, 000 Mdse. Inventory Accts. Payable Cash 500 12, 500 Cost of Mdse. Sold 7, 200 Mdse. Inventory 7, 200 July 18. Scully Company sold merchandise on account to Burton Co. , $12, 000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7, 200. Debit Credit 4, 000 12, 500 C 6 - 23

Accounting for Merchandise Transactions Scully Company (Seller) Description Debit Credit Cash Accts. Receivable 4, 000 Burton Co. (Buyer) Description Debit Credit Accts. Payable Cash 4, 000 Accts. Receivable 12, 500 Mdse. Inventory Sales Accts. Payable 12, 000 12, 500 Cash 500 Cost of Mdse. Sold 7, 200 Mdse. Inventory Cash 12, 260 7, 200 Sales Discounts 240 Accts. Payable Accts. Receivable Mdse. Inventory 12, 500 July 28. Scully Company received Cashpayment from Burton Co. less discount (2% x 12, 260 $12, 000). 4, 000 12, 500 240 C 6 - 24

Net. Solutions Merchandising Chart of Accounts Balance Sheet Accounts 110 111 112 113 115 116 117 120 123 124 125 126 100 Assets Cash Notes Receivable Accounts Receivable Interest Receivable Merchandise Inventory Office Supplies Prepaid Insurance Land Store Equipment Accumulated Depreciation— Store Equipment Office Equipment Accumulated Depreciation— Office Equipment 210 211 212 215 200 Liabilities Accounts Payable Salaries Payable Unearned Rent Notes Payable 300 Owner’s Equity 310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary C 6 - 25

Net. Solutions Merchandising Chart of Accounts Income Statement Accounts 400 Revenues 410 Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Income 611 Interest Income 700 Other Expense 710 Interest Expense 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Misc. Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Misc. Admin. Expense C 6 - 26

Net. Solutions Income Statement (Multiple-Step) For the Year Ended December 31, 2002 Revenue from sales: Sales $720, 185 Less: Sales returns and allow. $ 6, 140 Sales discounts 5, 790 11, 930 Net sales $708, 255 Cost of merchandise sold 525, 305 Gross profit $182, 950 Continued C 6 - 27

Operating expenses: Selling expenses: Sales salaries expense $60, 030 Advertising expense 10, 860 Depr. expense–store equip. 3, 100 Miscellaneous selling expense 630 Total selling expenses $ 74, 620 Administrative expenses: Office salaries expense $21, 020 Rent expense 8, 100 Depr. expense–office equip. 2, 490 Insurance expense 1, 910 Office supplies expense 610 Misc. admin. expenses 760 Total admin. expenses 34, 890 Total operating expenses 109, 510 Income from operations $ 73, 440 Continued C 6 - 28

Other income: Interest revenue $ 3, 800 Rent revenue 600 Total other income Other expense: Interest expense 2, 440 Net income $75, 400 $ 4, 400 1, 960 C 6 - 29

Net. Solutions Income Statement (Single-Step) For the Year Ended December 31, 2002 Revenues: Net sales $708, 255 Interest revenue 3, 800 Rent revenue 600 Total revenues $712, 655 Expenses: Cost of merchandise sold $525, 305 Selling expenses 74, 620 Administrative expenses 34, 890 Interest expense 2, 440 Total expenses 637, 255 Net income $ 75, 400 C 6 - 30

Net. Solutions Balance Sheet December 31, 2002 Assets Current assets: Cash $ 52, 950 Notes receivable Accounts receivable Interest receivable Merchandise inventory Office supplies 480 Prepaid insurance Total current assets 40, 000 60, 880 200 62, 150 2, 650 $219, 310 Continued C 6 - 31

Net. Solutions Balance Sheet December 31, 2002 Property, plant, and equipment: Land $ 10, 000 Store equipment $ 27, 100 Less accum. depreciation 5, 700 Office equipment $ 15, 570 Less accum. depreciation 4, 720 Total property, plant, and equipment Total assets $261, 560 21, 400 10, 850 42, 250 Continued C 6 - 32

Net. Solutions Balance Sheet December 31, 2002 Liabilities Current liabilities: Accounts payable $ 22, 420 Note payable (current portion) 5, 000 Salaries payable 1, 140 Unearned rent 1, 800 Total current liabilities Long-term liabilities: Note payable (due 2004) Total liabilities $ 50, 360 Owner’s Equity Chris Clark, capital 211, 200 Total liabilities and owner’s equity $30, 360 20, 000 $261, 560 C 6 - 33

Profitability Analysis Profitability is the ability of an entity to earn profits. This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available. Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet. C 6 - 34

Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets Net sales Total assets: Beginning of year End of year Total Average 2003 2002 $1, 498, 000 $1, 200, 000 $1, 053, 000 $1, 010, 000 1, 044, 500 1, 053, 000 $2, 097, 500 $2, 063, 000 $1, 048, 750 $1, 031, 500 C 6 - 35

Profitability Measures — Effective use of Assets Ratio of Net Sales to Assets 2003 2002 $1, 498, 000 $1, 200, 000 Net sales on account Total assets: Beginning of year $1, 053, 000 $1, 010, 000 End of year 1, 044, 500 1, 053, 000 Total $2, 097, 500 $2, 063, 000 Average $1, 048, 750 $1, 031, 500 Ratio of net sales to assets 1. 4 to 1 1. 2 to 1 Use: To assess the effectiveness in the use of assets C 6 - 36

Chapter 6 Power Notes Accounting for Merchandising Businesses This is the last slide in Chapter 6. Note: To see the topic slide, type 2 and press Enter. C 6 - 37