Accounting For Merchandising Operations,Ss

Chapter 5-1

Accounting for Merchandising

Operations

Accounting for Merchandising

Operations

Financial Accounting, Sixth Edition

Chapter Chapter 55Chapter Chapter 55

Chapter 5-2

1. Identify the differences between service and merchandising companies.

2. Explain the recording of purchases under a perpetual inventory system.

3. Explain the recording of sales revenues under a perpetual inventory system.

4. Explain the steps in the accounting cycle for a merchandising company.

5. Distinguish between a multiple-step and a single-step income statement.

6. Explain the computation and importance of gross profit.

7. Determine cost of goods sold under a periodic system.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

Chapter 5-3

Accounting for Merchandising Accounting for Merchandising OperationsOperations

Freight costsFreight costs

Purchase Purchase returns and returns and allowancesallowances

Purchase Purchase discountsdiscounts

Summary of Summary of purchasing purchasing transactionstransactions

MerchandisingMerchandising

OperationsOperations

MerchandisingMerchandising

OperationsOperations

Recording Recording

Purchases of Purchases of

MerchandiseMerchandise

Recording Recording

Purchases of Purchases of

Recording Recording

Sales of Sales of

Recording Recording

Sales of Sales of

Completing the Completing the

Accounting Accounting

CycleCycle

Completing the Completing the

Accounting Accounting

CycleCycle

Forms of Forms of

Financial Financial

StatementsStatements

Forms of Forms of

Financial Financial

StatementsStatements

Operating Operating cyclescycles

Inventory Inventory systems—systems—perpetual and perpetual and periodicperiodic

Sales returns Sales returns and and allowancesallowances

Sales Sales discountsdiscounts

Adjusting Adjusting entriesentries

Closing entriesClosing entries

Summary of Summary of merchandising merchandising entriesentries

Multiple-step Multiple-step income income statementstatement

Single-step Single-step income income statementstatement

Classified Classified balance sheetbalance sheet

Determining Determining cost of goods cost of goods sold under a sold under a periodic systemperiodic system

Chapter 5-4

Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

SO 1 Identify the differences between service and merchandising SO 1 Identify the differences between service and merchandising companies.companies.

Merchandising CompaniesMerchandising Companies

Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as sales revenue or sales.

Chapter 5-5

Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

Income MeasurementIncome Measurement

Illustration 5-1

Cost of goods sold is the total cost of merchandise

sold during the period.

Not used in a Service business.

Net Income (Loss)

LessEquals

Equals

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Chapter 5-6

The operating cycle of a merchandising company ordinarily is longer than that of a service company.

Operating CyclesOperating CyclesOperating CyclesOperating CyclesIllustration 5-2

Chapter 5-7

Features:

Perpetual SystemPerpetual System

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory.

3. Cost of goods sold is increased and Merchandise Inventory is decreased for each sale.

4. Physical count done to verify Inventory balance.

The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold.

Inventory SystemsInventory SystemsInventory SystemsInventory Systems

Chapter 5-8

Features:

Periodic SystemPeriodic System

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.

3. Calculation of Cost of Goods Sold:

Inventory SystemsInventory SystemsInventory SystemsInventory Systems

Beginning inventory

$ 100,000Add: Purchases, net

800,000Goods available for sale

900,000Less: Ending inventory

125,000Cost of goods sold

$ 775,000

Chapter 5-9

Made using cash or credit (on account).

Normally recorded when goods are received.

Purchase invoice should support each credit purchase.

Recording Purchases of Recording Purchases of MerchandiseMerchandiseRecording Purchases of Recording Purchases of MerchandiseMerchandise

SO 2 Explain the recording of purchases under a perpetual inventory SO 2 Explain the recording of purchases under a perpetual inventory system.system.

Illustration 5-4

Chapter 5-10

E5-2E5-2 Information related to Steffens Co. is presented below. Prepare the journal entry to record the transaction under a perpetual inventory system.

1. On April 5, purchased merchandise from Bryant Company for $25,000 terms 2/10, net/30, FOB shipping point.

Merchandise inventory 25,000April 5

Accounts payable 25,000

Chapter 5-11

Not all purchases increase Merchandise Inventory.

E5-2E5-2 Prepare the journal entry to record the transaction under a perpetual inventory system.

3. On April 7, purchased equipment on account for $26,000.

Equipment 26,000April 7

Accounts payable 26,000

Chapter 5-12

FOB shipping point - seller places goods Free On Board the carrier, and buyer pays freight costs.

FOB destination - seller places the goods Free On Board to the buyer’s place of business, and seller pays freight costs.

Freight CostsFreight Costs

Freight costs incurred by the seller on outgoing merchandise are an operating expense to the seller (Freight-out or Delivery Expense).

Chapter 5-13

E5-2E5-2 Continued Continued Prepare the journal entry to record the transaction under a perpetual inventory system.

2. On April 6, paid freight costs of $900 on merchandise purchased from Bryant.

Merchandise inventory 900April 6

Cash 900

Chapter 5-14

Purchaser may be dissatisfied because goods damaged or defective, of inferior quality, or do not meet specifications.

Purchase Returns and Purchase Returns and AllowancesAllowances

Return goods for credit if the sale was made on

credit, or for a cash refund if the purchase

was for cash.

May choose to keep the merchandise if the seller will grant an

allowance (deduction) from the purchase

price.

Purchase Return Purchase Allowance

Chapter 5-15

In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowance

d. Merchandise Inventory

Review QuestionReview Question

Chapter 5-16

4. On April 8, returned damaged merchandise to Bryant Company and was granted a $4,000 credit for returned merchandise.

Accounts payable 4,000April 8

Merchandise inventory 4,000

Chapter 5-17

Credit terms may permit buyer to claim a cash discount for prompt payment.

Advantages:

Purchaser saves money.

Seller shortens the operating cycle.

Purchase DiscountsPurchase 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 5-18

Purchase DiscountsPurchase Discounts TermsTerms

2% discount if paid within 10

1% discount if paid within

first 10 days of next month.

2/10 1/10 EOM

Net amount due in 30

days, 60 days, or within the first 10 days of the next

month.

n/30, n/60, or n/10 EOM

Chapter 5-19

5. On April 15, paid the amount due to Bryant Company in full.

Accounts payable 21,000April 15

Merchandise inventory 420

Cash 20,580

(Discount = $21,000 x 2% = $500)

Chapter 5-20

5. On April 15, paid the amount due to Bryant Company in full.

Accounts payable 21,000April 16 or later Cash

21,000

What entry would be made if the company failed to pay within 10 days?

Chapter 5-21

Should discounts be taken when offered?

Purchase DiscountsPurchase Discounts

Discount of 2% on $25,000 500.00$ $25,000 invested at 10% f or 20 days 136.99

Savings by taking the discount 363.01$

Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an interest rate of 2% on the use of $25,000 for 20 days.

Chapter 5-22

Merchandise I nventory

Debit Credit

$25,000 8th - Return$4,000

Balance

5th - Purchase

$21,480$21,480

420 15th - Discount

Recording Purchases of Recording Purchases of MerchandiseMerchandiseRecording Purchases of Recording Purchases of MerchandiseMerchandiseSummary of Purchasing Summary of Purchasing TransactionsTransactions

9006th – Freight-in

E5-2E5-2

Chapter 5-23

Made for cash or credit (on account).

Normally recorded when earned, usually when goods transfer from seller to buyer.

Sales invoice should support each credit sale.

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

SO 3 Explain the recording of sales SO 3 Explain the recording of sales revenues under a perpetual revenues under a perpetual inventory system.inventory system.

Illustration 5-4

Chapter 5-24

Two Journal Entries to Record a SaleTwo Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales XXX

Cost of goods sold XXX

Merchandise inventory XXX

Selling

Chapter 5-25

E5-5E5-5 Presented are transactions related to Wheeler Company.

1. On December 3,Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. The cost of the merchandise sold was $350,000.

2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balance due from Hashmi Co.

Instructions: Prepare the journal entries to record these transactions on the books of Wheeler Company using a perpetual inventory system.

Chapter 5-26

E5-5E5-5 Prepare the journal entries for Wheeler Company .

1. On December 3, Wheeler Company sold $500,000 of merchandise to Hashmi Co., terms 2/10, n/30, FOB shipping point. Cost of merchandise sold was $350,000.

Accounts receivable 500,000Dec. 3

Sales500,000

Cost of goods sold 350,000

Merchandise inventory350,000

Chapter 5-27

“Flipside” of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns and allowances as a percentage of sales.

could distort comparisons between total sales in different accounting periods.

Sales Returns and AllowancesSales Returns and Allowances

Chapter 5-28

E5-5E5-5 Prepare the journal entries for Wheeler Company.

2. On December 8, Hashmi Co. was granted an allowance of $27,000 for merchandise purchased on December 3.

Sales returns and allowances 27,000Dec. 8

Accounts receivable27,000

Chapter 5-29

E5-5E5-5 Prepare the journal entries for Wheeler Company.

2. Variation On Dec. 8, Hashmi Co. returned merchandise for credit of $27,000. The original cost of the merchandise to Wheeler was $19,800.

Sales returns and allowances 27,000Dec. 8

Merchandise inventory 19,800

Cost of goods sold19,800

Chapter 5-30

The cost of goods sold is determined and recorded each time a sale occurs in:

a. periodic inventory system only.

b. a perpetual inventory system only.

c. both a periodic and perpetual inventory system.

d. neither a periodic nor perpetual inventory system.

Chapter 5-31

Offered to customers to promote prompt payment.

“Flipside” of purchase discount.

Contra-revenue account (debit).

Sales DiscountSales Discount

Chapter 5-32

E5-5E5-5 Prepare the journal entries for Wheeler Company .

3. On December 13, Wheeler Company received the balance due from Hashmi Co.

Cash 463,540Dec. 13

Sales discounts 9,460

** [($500,000 – $27,000) X 2%]

*** ($500,000 – $27,000)

* ($473,000 – $9,460)

Chapter 5-33

E5-5E5-5 Variation Prepare the sales revenue section of the income statement for Wheeler Company.

Sales revenue

Sales 500,000$ Less: Sales returns and allowances (27,000)

Sales discounts (9,460) Net sales 463,540

I ncome Statement (Partial)

For the Month Ended Dec. 31,

Wheeler Company

Chapter 5-34

Generally the same as a service company.

One additional adjustment to make the records agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Adjusting EntriesAdjusting Entries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising SO 4 Explain the steps in the accounting cycle for a merchandising company.company.

Chapter 5-35

Close all accounts that affect net income.

Closing EntriesClosing Entries

E5-8E5-8 Presented is information related to Rogers Co. for the month of January 2008. Rogers uses the perpetual inventory method.Ending inventory per books 21,600$ Rent expense 20,000$

Ending inventory per count 21,000 Salary expense 61,000

Cost of goods sold 218,000 Sales discount 10,000

Freight-out 7,000 Sales returns 13,000

I nsurance expense 12,000 Sales 350,000

Required: (a) Prepare the necessary adjusting entry for inventory.

(b) Prepare the necessary closing entries.

Chapter 5-36

E5-8E5-8 (a) Prepare the necessary adjusting entry for inventory.

Cost of goods sold 600

Merchandise inventory 600

Ending inventory per books 21,600$

Ending inventory per count 21,000

Overstatement of inventory 600$

Chapter 5-37

Sales 350,000Income summary 350,000

Income summary 341,600Cost of goods sold 218,600Freight-out 7,000Insurance expense 12,000

Income summary 8,400Retained earnings 8,400

Rent expense 20,000

E5-8E5-8 (b) Prepare the necessary closing entries.

Salary expense 61,000Sales discounts 10,000Sales returns 13,000

Chapter 5-38

Shows several steps in determining net income.

Two steps relate to principal operating activities.

Distinguishes between operating and non-operating activities.

Multiple-Step Income Multiple-Step Income StatementStatement

Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements

SO 5 Distinguish between a multiple-step and a single-step income SO 5 Distinguish between a multiple-step and a single-step income statement.statement.

Chapter 5-39

SO 6 Explain the computation and importance of gross profit.SO 6 Explain the computation and importance of gross profit.

Forms of Forms of Financial Financial StatementStatementss

Illustration 5-11

Key Items:Key Items:

Net salesNet sales

Gross profitGross profit

Gross profit Gross profit raterate

Illustration 5-8

Chapter 5-40 SO 5 Distinguish between a multiple-step and a single-step income SO 5 Distinguish between a multiple-step and a single-step income

statement.statement.

Illustration 5-11

Net salesNet sales

Operating Operating expensesexpenses

Chapter 5-41

Net salesNet sales

Operating Operating expensesexpenses

Nonoperating Nonoperating activitiesactivities

Net incomeNet income

Illustration 5-11

Chapter 5-42

The multiple-step income statement for a merchandiser shows each of the following features except:

a. gross profit.

b. cost of goods sold.

c. a sales revenue section.

d. investing activities section.

Chapter 5-43

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.

Single-Step Income StatementSingle-Step Income Statement

Chapter 5-44

SingleSingle-Step-Step

Illustration 5-12

Chapter 5-45

Illustration 5-13

Classified Balance SheetClassified Balance Sheet

Chapter 5-46

Periodic System

Separate accounts used to record purchases, freight costs, returns, and discounts.

Company does not maintain a running account of changes in inventory.

Ending inventory determined by physical count.

Determining Cost of Goods Sold Determining Cost of Goods Sold Under a Periodic SystemUnder a Periodic SystemDetermining Cost of Goods Sold Determining Cost of Goods Sold Under a Periodic SystemUnder a Periodic System

SO 7 Determine cost of goods sold under a periodic system.SO 7 Determine cost of goods sold under a periodic system.

Chapter 5-47

Determining Cost of Goods Sold Determining Cost of Goods Sold Under a Periodic SystemUnder a Periodic SystemDetermining Cost of Goods Sold Determining Cost of Goods Sold Under a Periodic SystemUnder a Periodic System

SO 7 Determine cost of goods sold under a periodic system.SO 7 Determine cost of goods sold under a periodic system.

Calculation of Cost of Goods Calculation of Cost of Goods SoldSold

$316,000

Illustration 5-14

Chapter 5-48

“When is a sale not really a sale?”

“Why does it matter?”

All About YouAll About YouAll About YouAll About You

When Is a Sale a Sale?When Is a Sale a Sale?

Some Facts:

In early 2005 the shareholders of Krispy Kreme Doughnuts filed a lawsuit against management, alleging the company was shipping twice as many doughnuts to wholesale customers than ordered.

The SEC investigated claims that Harley-Davidson was shipping motorcycles to dealers in excess of dealer requests, to give appearance of strong sales.

Chapter 5-49

When Is a Sale a Sale?When Is a Sale a Sale?

Some Facts:

In a recent lawsuit settlement, pharmaceutical company Bristol-Myers Squibb paid a $150 million fine for an alleged channel stuffing scheme.

An SEC investigation concluded that The Coca-Cola Company shipped $1.2 of excessive beverage concentrate to bottlers in Japan during a three-year period. The bottlers’ inventories surged 62% during this time, while their sales increased only 11%.

Chapter 5-50

Chart to illustrate that revenue recognition issues often require companies to correct—restate—their financial statements.

Source: Terry Baldwin and Daniel Yoo, Restatements—Traversing Shaky Ground: An Analysis for Investors,” Glass Lewis & Co., June 2, 2005, p. 9, Graph 7.

Chapter 5-51

What Do You Think?What Do You Think?

“Is channel stuffing an ethical business practice?”

YES: Motorcycles and pharmaceuticals can’t be sold if they are sitting in the manufacturer’s warehouse.

NO: If goods are intentionally shipped to customers when the customer hasn’t requested them, and the seller has a high expectation that the goods will be returned, then this clearly is not a real sale.

Chapter 5-52

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