Merchandising Purchases Sales Objectives Understand the difference between
Merchandising – Purchases & Sales
Objectives Understand the difference between Merchandising and Service Companies Learn the accounts: COGS and Inventory Understand the costs of inventory Learn the Journal entries for a Perpetual Inventory System – Purchases and Sales Periodic Inventory System – Purchases and Sales MULTI-STEP INCOME STATEMENT: For a Perpetual Inventory System For a Periodic Inventory System: Learn how to Calculate COGS, given a Periodic Inventory System
What are Merchandise Companies? Merchandise Companies Buy and Sell Goods…. . such as…. Fashion #1 Retailer in Indonesia Groceries….
What do they do? Merchandise companies buy and sell GOODS Revenues from the sales of Goods are booked to the account: SALES
But now we are selling Inventory, not Service…. So we need to add new accounts: INVENTORY and COST OF GOODS SOLD, or “COGS” (yes, that is an account title)
Compare Merchandise company’s Income Statement to a Service Company Merchandise Company Service Company SALES SERVICE REVENUE COGS Gross Margin OPERATING EXPENSES list individually) Net Income Before Tax INCOME TAX Net Income after Tax Gross Margin, Net Income before Tax and Net Income are all calculations. NOT ACCOUNTS!
Compare Merchandise company’s Income Statement to a Service Company COGS = the TOTAL cost of goods sold during the current period. Service Companies do NOT have goods, so they don’t have COGS or Gross Margin.
What do we use for cost for Inventory? Inventory is reported on the Balance Sheet at its historic cost. And…it is categorized as a Current Asset. (why? Because it is expected to be used up in one year or one operating cycle, whichever is shorter) Cost includes all costs necessary to get the asset ready for its intended purpose And that means ALL costs!
What ARE the cost components for Inventory? The original invoice price of the inventory (hereafter referred to as cost, not price). Freight in – cost to transport the inventory from the Vendor (the Seller) to the Company (the Buyer). Purchase discounts Purchase returns LET’S TAKE AN EXAMPLE
End of Part 1 Next VIDEO: Perpetual Inventory Journal Entries - Purchases
Merchandising – Part 2 Objectives Understand the difference between Merchandising and Service Companies Learn the accounts: COGS and Inventory Understand the costs of inventory Learn the Journal entries for a Perpetual Inventory System – Purchases and Sales Periodic Inventory System – Purchases and Sales MULTI-STEP INCOME STATEMENT: For a Perpetual Inventory System For a Periodic Inventory System: Learn how to Calculate COGS, given a Periodic Inventory System
A PERPETUAL SYSTEM – a continuous record of Inventory & ACOGS Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account. Purchases increase (debit) Merchandise Inventory. Freight costs increase Merchandise Inventory. Purchase Returns and Allowances Merchandise Inventory. and Purchase Discounts decrease (credit)
A PERPETUAL SYSTEM – a continuous record of Inventory & ACOGS Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account. AND WHEN THE COMPANY SELLS THE INVENTORY: Cost of Goods Sold is increased and Merchandise Inventory is decreased Physical count done to verify Merchandise Inventory balance.
PERPETUAL INVENTORY SYSTEM – Recording the Purchase Invoice # 2014 -199 Made using cash or credit (on account). Judith's Calculators 3000 Landerholm Circle, Room C 207 G Bellevue, WA 98004 Normally recorded when goods are received. Purchase invoice should support each credit purchase. Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell. SOLD TO: ADDRESS Date Item # TI-86 Sh-27 2/4/2014 Description Jennifer's Office Supplies 100 Main Street Bellevue, WA 98007 Salesperson Jeff Wong Terms: 2/10, n/30 Calculator, graphing Calculator, plastic Quantity Unit Price 20 25 $65 $4 Total Important: All returns must be made within 10 days FOB: Shipping Point Shipper: UPS Amount $ $ 1, 300. 00 100. 00 $ 1, 400. 00
JOURNAL ENTRY: WHO’S BOOKS ARE WE PREPARING? (Buyer or Seller? ) REMEMBER: WHO IS THE BUYER? Illustration: From INVOICE NO. 2014 -199 record the journal entry Jennifer’s Office Supplies would make to record its purchase from Judith’s Calculators. # DATE Account Titles AND Description 2/4/14 Merchandise Inventory Accounts Payable To recognize inventory purchased Debit Credit 1, 400
Freight Costs – Terms of Sale—who pays the freight bill? Depends. Read the terms to see WHICH PARTY owns the Inventory during transport. FOB SHIPPING POINT: Title Transfer to Buyer at the Shipping point. Therefore BUYER PAYS THE FREIGHT BILL. Most common. Buyer owns during transport Seller ================ Buyer FOB DESTINATION: Title Transfer to Buyer at the Destination (at the Buyer’s store/warehouse/etc. ) Therefore SELLER PAYS THE FREIGHT BILL Seller owns during transport Seller ================ Buyer Interesting note: I have driven a Kenworth truck….
So who pays the freight bill for this purchase? Check the Invoice: Invoice # 2014 -199 Judith's Calculators 3000 Landerholm Circle, Room C 207 G Bellevue, WA 98004 Assume the Freight Bill is for $140 Note: Freight Bills must be paid promptly, usually within 10 days, so we will use the CASH account, not Accounts Payable SOLD TO: ADDRESS Date Item # TI-86 Sh-27 2/4/2014 Description Jennifer's Office Supplies 100 Main Street Bellevue, WA 98007 Salesperson Jeff Wong Terms: 2/10, n/30 Calculator, graphing Calculator, plastic Quantity Unit Price 20 25 65 4 FOB: Shipping Point Shipper: UPS Amount $ $ 1, 300. 00 100. 00 $ 1, 400. 00 Freight Bills usually come from the Shipper, not the Vendor. Total Important: All returns must be made within 10 days
JOURNAL ENTRY: Jennifer’s Books – Freight Bill Terms: FOB, Shipping Point # DATE Account Titles AND Description 2/13/14 Merchandise Inventory Cash To record freight bill. Debit Credit 140
What if……the TERMS were FOB, DESTINATION? And Judith’s Calculators had to pay the Freight Bill JOURNAL ENTRY: Judith’s Books – Freight Terms: FOB, Destination # DATE Bill Account Titles AND Description 2/13/14 Freight Out Cash To record freight bill. Debit Credit 140 NOTE: This entry is NOT made by Jennifer’s Office Supplies, but by Judith’s Calculators and just shown to demonstrate how a Freight Bill would be recorded if the terms were FOB, Destination.
Purchase Returns & Allowances Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns: Purchase Allowances Return goods for credit ($$$ deduction) if the sale was made on credit, or for a cash refund if the purchase was for cash. Buyer may choose to keep the merchandise if the seller will grant an allowance ($$$ deduction) from the purchase price.
JOURNAL ENTRY: Jennifer’s Books – Jennifer returns TWO calculators to Judith’s Calculators. # DATE Account Titles AND Description Debit 2/13/14 Accounts Payable 130 Merchandise Inventory To record return of 2 calculators at $65 each. Credit 130
Purchase Discounts—Paying the Bill Credit terms may permit buyer to claim a cash discount for early payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase DISCOUNTS: For Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty. ” 2% cash discount if payment is made within 10 days…. OTHERWISE, THE FULL AMOUNT is due in 30 days.
Purchase Discounts There are LOTS of payment TERMS. 2/10, N/30 1/10, EOM n/10 EOM 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. Net amount due within the first 10 days of the next month.
Paying the Bill How much does Jennifer owe Judith? Let’s take a look The gross invoice price of $1, 400 less purchase returns and allowances of $130) is $1, 270. The last day of the discount period is on February 14*. Prepare the journal entry Jennifer makes to record its February 14* payment. ACCTS PAYABLE 1, 400 130 1, 270 * Feb 14 is Valentine’s Day, don’t forget…
JOURNAL ENTRY: Jennifer’s Books – Jennifer pays the balance on her bill, with discount # DATE Account Titles AND Description 2/14/14 Accounts Payable Merchandise Inventory Cash To record payment of bill with 2% discount. Debit Credit 1, 270 25 1, 245 $1, 270 x 2% = $25. 40 (but please ROUND to nearest dollar) * Feb 14 is Valentine’s Day, don’t forget…
JOURNAL ENTRY: Jennifer’s Books – IF Jennifer pays the balance on her bill WITHOUT discount # DATE Account Titles AND Description Debit 3/4/14 Accounts Payable Cash To record payment of bill. 1, 270 Credit 1, 270 NOTE: This entry is NOT made by Jennifer’s Office Supplies, but is shown to demonstrate how a journal would be recorded if the Jennifer did NOT take the discount
Discounts: To take or not to take? TAKE THEM!!! Passing up the discount offered equates to paying an interest rate of 2% on the use of $1, 270 for 20 days. A DISCOUNT NOT TAKEN IS $$$ LOST Example: 2% for 20 days = Annual rate of 36. 5% (365/20 = 18. 25 twenty-day periods x 2% = 36. 5%) You pay an extra 36. 5% more for your goods.
How much did the Inventory cost Jennifer’s Office Supply? Purchase Plus: Freight-in INVENTORY 1, 40 0 140 13 0 Less: Return 2 5 $1, 3 85 Less: Discount
End of Part 2 Next VIDEO: Perpetual Inventory Journal Entries - Sales
Merchandising – Part 3 Objectives Understand the difference between Merchandising and Service Companies Learn the accounts: COGS and Inventory Understand the costs of inventory Learn the Journal entries for a Perpetual Inventory System – Purchases and Sales Periodic Inventory System – Purchases and Sales MULTI-STEP INCOME STATEMENT: For a Perpetual Inventory System For a Periodic Inventory System: Learn how to Calculate COGS, given a Periodic Inventory System
JOURNAL ENTRY: Sales Invoice # 2014 -199 Judith's Calculators 3000 Landerholm Circle, Room C 207 G Bellevue, WA 98004 Sales invoice should support each credit sale. We will record Judith’s Calculators’ transactions SOLD TO: ADDRESS Date Item # TI-86 Sh-27 2/4/2014 Description Jennifer's Office Supplies 100 Main Street Bellevue, WA 98007 Salesperson Jeff Wong Terms: 2/10, n/30 Calculator, graphing Calculator, plastic Quantity Unit Price 20 25 65 4 Total Important: All returns must be made within 10 days FOB: Shipping Point Shipper: UPS Amount $ $ 1, 300. 00 100. 00 $ 1, 400. 00
JOURNAL ENTRY: Judith Calculators’s books. To record the SALE to Jennifer’s Office Supplies – 4 ACCOUNTS. # DATE Account Titles AND Description Debit 2/4/14 Accounts Receivable 1, 400 Sales 1, 400 COGS 1, 050 Inventory 1, 050 To record sale, under Perpetual System. NOTE: COGS: Assume the COGS for Judith’s was 75% of sales, or $1, 050. Credit
Why do we use the account: Sales Returns & Allowances? The counterpart to purchase returns and allowances. Contra-revenue account (debit). Sales account is not reduced (debited) because: Ø Gives us important information about Returns that would be “buried” if booked directly to Sales.
JOURNAL ENTRY: Judith’s books. SALES RETURNS & ALLOWANCES # DATE Account Titles AND Description 2/13/14 Sales Returns & Allowances Accounts Receivable Inventory COGS To record the return, under Perpetual System. Debit Credit 130 98 NOTE: COGS: Assume the COGS for Judith’s was 75% of the sales return, or $98. 98
Sales Discounts—the reward to our customers for paying promptly Sales Discount Offered to customers to promote prompt payment. Counterpart to purchase discount. Contra-revenue account (debit). Sales account is not reduced (debited) because: Ø Gives us important information about Discounts that would be “buried” if booked directly to Sales.
JOURNAL ENTRY: Judith’s books. SALES DISCOUNTS # DATE Account Titles AND Description Debit Credit 2/14/14 Cash 1, 245 Sales Discounts 25 Accounts Receivable 1, 270 To record the payment, under Perpetual System. * Feb 14 is Valentine’s Day, don’t forget…
Adjusting entries… Merchandising companies will do the same sorts of adjusting entries that Service companies do (prepaid/accruals). IN ADDITION: Merchandising companies also must adjust Inventory. Companies take physical inventory to prove that the actual inventory equals what the perpetual inventory system(the T account and computer system) says is the balance. And it will almost always never be exactly perfect So…. . an adjusting entry must be made. MUST
JOURNAL ENTRY: Jennifer’s Books – ADJUSTMENT: Jennifer has an unadjusted balance of $25, 200 in the Merchandise Inventory account. Through a physical count, Jennifer determines that its actual merchandise inventory at year-end is $24, 700. The company would make an adjusting entry as follows. # DATE Account Titles AND Description Debit 12/31/14 COGS Merchandise Inventory To record adjustment of inventory to physical count. 500 Credit 500
Closing the Books Merchandise companies close the books almost CLOSING REVENUE: use Sales, instead of Service Revenue. CLOSING EXPENSES: Include COGS in the expenses to be closed.
End of Part 3 Next VIDEO: MULTI-STEP INCOME STATEMENT - Perpetual Inventory System
Merchandising – Part 4 Objectives Understand the difference between Merchandising and Service Companies Learn the accounts: COGS and Inventory Understand the costs of inventory Learn the Journal entries for a Perpetual Inventory System – Purchases and Sales Periodic Inventory System – Purchases and Sales MULTI-STEP INCOME STATEMENT: For a Perpetual Inventory System For a Periodic Inventory System: Learn how to Calculate COGS, given a Periodic Inventory System
MULTI STEP INCOME STATEMENT Just like the Classified Balance Sheet, the Multi-Step Income Statement give us more information about the Company More subtotals (more steps) Two specific subtotals that relate to principle operating activities of a Company Separate the Company’s activities into Operating Non-Operating
MULTI STEP INCOME STATEMENT How Sales are presented… Jennifer’s Office Supplies Company Multi-step Income Statement For the year ending Feb 28, 2014 Sales Revenues Sales returns and allowances Sales discounts Net Sales $250, 000 $ 8, 000 5, 000 13, 000 $237, 000
NEW CALCULATIONS --- NET SALES AND GROSS PROFIT ( also called GROSS MARGIN) Jennifer’s Office Supplies Company Multi-step Income Statement For the year ending Feb 28, 2014 Sales Revenues Sales returns and allowances Sales discounts Net Sales Cost of Goods Sold Gross Margin (also called Gross Profit) $250, 000 $ 8, 000 5, 000 13, 000 $237, 000 142, 200 $94, 800
Jennifer’s Office Supplies Company Multi-step Income Statement For the year ending Feb 28, 2014 Key Items to Note: • Net Sales • Gross Margin • Operating Expenses…. • AND Operating Income Sales Revenues Sales returns and allowances Sales discounts Net Sales Cost of Goods Sold Gross Margin Operating Expenses Salaries expense Utilities expense Advertising expense Depreciation expense Freight-out Insurance expense $250, 000 $8, 000 5, 000 13, 000 $237, 000 142, 200 $94, 800 35, 550 7, 584 10, 428 4, 740 14, 220 2, 000 Total Operating Expenses $74, 522 Income from Operations $20, 278
What is the Significance of Operating Income? Operating Income tells you how well the Company is doing in its core business. For example…. How well is Starbucks doing at selling coffee and coffee products? How well does Amazon do at selling products? How well does PACCAR do at selling Trucks? Other Income and Expenses refer to ancillary activities which a company does and must report, but we separate them for better analysis. Examples: interest expense or revenue, gains or losses on equipment sales, and losses from vandalism.
Here I show the Other Revenue/Gains and Other Expenses/Losses. I compressed the top part of the multi-step for this slide only. The statement will show all the detail
Here is the entire Multi Step Income Statement Assume a 20% tax rate, percentage will vary
Compared to the 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. But…. . companies usually do NOT use Single Step
SINGLE STEP Total Revenues - Total Expenses = Net Income
End of Part 4 Next VIDEO: - Periodic Inventory System - Journal Entries
Merchandising – Part 5 Objectives Understand the difference between Merchandising and Service Companies Learn the accounts: COGS and Inventory Understand the costs of inventory Learn the Journal entries for a Perpetual Inventory System – Purchases and Sales Periodic Inventory System – Purchases and Sales MULTI-STEP INCOME STATEMENT: For a Perpetual Inventory System For a Periodic Inventory System: Learn how to Calculate COGS, given a Periodic Inventory System
Periodic Inventory System Used in certain industries Company does not maintain a running account of changes in inventory. Ending inventory just counted “periodically” to see what is on hand then COGS booked. 1 journal entry for sale -- COGS not recorded at Point of Sale (POS)
Periodic Inventory System – Judith’s books Sales Revenues – under a Periodic System ONLY 1 entry is made for each sale one to record sale COGS – ONLY RECORDED “Periodically”
Periodic Inventory System – Judith’s books JOURNAL ENTRY: To record the SALE to Jennifer’s Office Supplies – 2 ACCOUNTS. # DATE Account Titles AND Description Debit 2/4/14 Accounts Receivable Sales To record sale, under Periodic System. 1, 400 NOTE: COGS: Recorded only “periodically”. Credit 1, 400
Periodic Inventory System – Judith’s books JOURNAL ENTRY: Judith’s books. SALES RETURNS & ALLOWANCES # DATE Account Titles AND Description 2/13/14 Sales Returns & Allowances Accounts Receivable To record the return, under Periodic System. NOTE: COGS: Recorded only “periodically”. Debit Credit 130
Periodic Inventory System – Judith’s books JOURNAL ENTRY: Judith’s books. SALES DISCOUNTS—same as Perpetual # DATE Account Titles AND Description 2/14/14 Cash Sales Discounts Accounts Receivable To record the payment, under Periodic System. Debit Credit 1, 245 25 1, 270 * Feb 14 is Valentine’s Day, don’t forget…
Periodic Inventory System - purchases VERY similar to how we treated Supplies. Buy the inventory (one journal entry)… then later COUNT the inventory to figure out what is left and what was used up (sold). Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory just counted “periodically” to see what is on hand then COGS calculated and a Journal Entry booked.
Here is the end result and how you calculate COGS, using Periodic Note the New Accounts: 1. Purchases 2. Purchase Returns and Allowances 3. Purchase Discounts 4. Freight-In Only used for Periodic Inventory Systems, NOT Perpetual
Periodic Inventory System - Jennifer PERIODIC INVENTORY SYSTEM – FOR THE SAME TRANSACTIONS WITH Jennifer’s Office Supplies JOURNAL ENTRY: The purchase of merchandise # DATE Account Titles AND Description 2/4/14 Purchases Accounts Payable To recognize inventory purchased Debit Credit 1, 400
Periodic Inventory System - Jennifer JOURNAL ENTRY: Jennifer’s Books – Freight Bill FOB, Shipping # Terms: DATE Account Titles AND Description. Point Debit 2/13/14 Freight In Cash To record freight bill. Credit 140
Periodic Inventory System - Jennifer # JOURNAL ENTRY: Jennifer’s Books – Jennifer returns TWO calculators to Judith’s Calculators. DATE Account Titles AND Description Debit 2/13/14 Accounts Payable 130 Purchase returns and allowances To record return of 2 calculators at $65 each. Credit 130
Periodic Inventory System - Jennifer # JOURNAL ENTRY: Jennifer’s Books – Jennifer pays the balance on her bill, with discount, on Feb 14* DATE Account Titles AND Description 2/14/14 Accounts Payable Purchase Discounts Cash To record payment of bill with 2% discount. $1, 270 x 2% = $25. 40 (but please ROUND to nearest dollar) Debit Credit 1, 270 25 1, 245 * Feb 14 is Valentine’s Day, don’t forget…
At the end of the year…. for Companies using Periodic Inventory System… An Adjustment must be made to record the ending Inventory and COGS Jennifer's Office Supply Company CALCULATION OF COST OF GOODS SOLD - PERIODIC INVENTORY SYSTEM For the month ending Feb 28, 2014 COST OF GOODS SOLD: INVENTORY - MAR 1, 2013 Purchases Less: Purchase Returns & Allowances Purchase Discounts Net Purchases Add: Freight-in Cost of goods Purchased Cost of Goods Available for Sale Ending Inventory - FEB 28, 2014 - PHYSICALLY COUNTED Cost of Goods Sold 1, 200 654 $1 2, 00 54 46 04 $143, 9 000 $11, 13, 8 130, 0 13, 0 50 50 50 00 143, 0 154, 0 11, 8 142, 2
Periodic Inventory System - Jennifer JOURNAL ENTRY: Judith’s books. To Adjust the Inventory account after Physical Inventory Remember, from the previous slide: Beginning Inventory: Ending Inventory (as counted): COGS: Purchases: Purchase Returns/Allowances Purchase Discounts Freight-In $ 11, 000 11, 850 142, 200 143, 900 11, 200 2, 654 13, 004 After physical inventory, a Journal Entry is done to make Inventory = $11, 850 COGS = $142, 200
Periodic Inventory System - Jennifer # DATE Account Titles AND Description 2/28/14 Merchandise Inventory COGS Purchase Returns & Allowances Purchase Discounts Purchases Freight-in To record the Ending Inventory and COGS Debit Credit 850 142, 200 11, 200 2, 654 143, 900 13, 004 * Feb 14 is Valentine’s Day, don’t forget…
The MAIN difference between periodic and perpetual is…. The point at which the costs of goods sold is computed.
Companies that use Periodic inventory take a physical count to. . . • determine ending inventory • compute cost of goods sold
Companies that use Perpetual inventory take a physical count to. . . Check accuracy of “book inventory” to actual inventory.
Comparing Perpetual and Periodic – Purchasing Transactions Entries on Jennifer's Office Supplies Books - Purchases Date 4 -Feb Transaction Purchase of merchandise on credit PERPETUAL INVENTORY SYSTEM Merchandise Inventory 1, 40 400 Purchases 0 1, 4 Accounts Payable Merchandise Inventory Freight costs 13 -Feb on purchase PERIODIC INVENTORY SYSTEM 00 1, 400 Accounts Payable 14 140 Freight-iin 0 1 Cash 40 Cash 140 13 Purchase returns and 13 -Feb allowances Accounts Payable 130 Accounts Payable Merchandise Inventory 1 30 0 Purchase Returns and Allowances 130 1, 14 -Feb Payment on account w/discount Accounts Payable Cash Merchandise Inventory 270 Accounts Payable 1, 245 25 Cash Purchase Discounts 1, 270 1, 245 25
Comparin g Perpetual and Periodic – SALES Transactio ns Entries on Judith's Calculators' Books - Sales Date Transaction PERPETUAL INVENTORY SYSTEM PERIODIC INVENTORY SYSTEM 1, 4 Accounts Receivable 00 1, 4 00 Sales 1, 0 50 COGS Sale of merchandise on 4 -Feb credit Mercha Inventory Sales Return and Allowances Accounts Receivable Merchandise Inventory Return of 13 -Feb Merchandise No entry for COGS 1, 0 50 1 Sales Return and Allowances 30 1 30 Accounts Receivable 98 No entry for COGS 98 COGS 1, 2 14 -Feb Cash received on account w/discount 1, 2 Cash 45 Sales Discounts 25 Accounts Receivable 1, 2 70 1, 2 Accounts Receivable 70
Let’s Practice
Solution – Multi-Step - Perpetual
Solution – COGS PERIODIC
End Part 5 of Merchandising Companies Next VIDEO: - New topic: Inventories, Cost Flow Assumptions
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