Merchandising Operations And The Multiple Step Income Statement

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MERCHANDISING MERCHANDISING OPERATIONS AND OPERATIONS AND

THE MULTIPLE-THE MULTIPLE-STEP INCOME STEP INCOME STATEMENTSTATEMENT

Chapter 5

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Who Doesn’t Shop at Wal-Mart?

What store was the first retail gianta Wal-Martb Sears, Roebuckc J. C. Penny

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Who Doesn’t Shop at Wal-Mart?

What store was the first retail gianta Wal-Martb Sears, Roebuckc J. C. Penny

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1.1. Identify the difference between a Identify the difference between a service enterprise and a service enterprise and a merchandising company. merchandising company.

2.2. Explain the recording of sales Explain the recording of sales revenues including discounts and revenues including discounts and returnsreturns

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

Study Objectives

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

6.6. Explain the recording of purchases and Explain the recording of purchases and sales of inventory under a periodic inventory sales of inventory under a periodic inventory system.system.

7.7. Explain the factors affecting profitability.Explain the factors affecting profitability.

Study Objectives

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Differences Between a Service Company and a Merchandising Company

Primary Source of Revenue Service Company- performs services

Barber, electrician, plumber, attorney, CPA Merchandise Company- sale of merchandise

Cars, clothing, food, office supplies

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Income Measurement for Income Measurement for Merchandise CompaniesMerchandise Companies

Total cost of Total cost of merchandise merchandise sold during sold during the periodthe period Selling and Selling and

AdministrativeAdministrative

Operating Cycles

Inventory Systems - Inventory Systems - PerpetualPerpetual

Maintain detailed records of purchases and salesMaintain detailed records of purchases and sales

Cost of goods sold is determined with each saleCost of goods sold is determined with each sale

Compute and record Cost of goods sold

Inventory Systems - Inventory Systems - PerpetualPerpetual

Computers and Computers and electronic scanning electronic scanning

equipment make equipment make perpetual inventory perpetual inventory more cost effective!more cost effective!

Inventory Systems - Inventory Systems - PeriodicPeriodic

No detailed records No detailed records

Cost of goods sold determined at end of the Cost of goods sold determined at end of the period by taking a physical count and pricing it.period by taking a physical count and pricing it.

You are only responsible for the periodic systemYou are only responsible for the periodic system

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Recording Purchases of Merchandise

Purchase of merchandise is recorded when Purchase of merchandise is recorded when goods are received from the sellergoods are received from the seller

Every purchase should be supported by Every purchase should be supported by business documentsbusiness documents

Cash purchases have receipts or cancelled Cash purchases have receipts or cancelled checkschecks

Credit purchases are supported by Credit purchases are supported by purchase invoicespurchase invoices

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SellerSeller

Invoice Invoice datedate

BuyerBuyer

Credit Credit termsterms

Item details

Item detailsTot

alTot

al

PurchasePurchase of Merchandise of Merchandise

Debit CreditDebit Credit

May 4 Purchases 3,800 May 4 Purchases 3,800 Accounts Payable Accounts Payable 3,800 3,800

To record goods purchased on accountTo record goods purchased on account

3,8003,800

Accounts Accounts PayablePayable

PurchasesPurchases

May 4May 4 May 4May 4 3,8003,800

Sauk purchased $ 3,800 of goods on account.Sauk purchased $ 3,800 of goods on account.

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Merchandise InventoryMerchandise Inventory Includes all purchases of merchandise for Includes all purchases of merchandise for

re-sale to customers and costs to get it to re-sale to customers and costs to get it to the businessthe business

Does not include items purchased for use Does not include items purchased for use and not for resaleand not for resale

If an entity sells cash registers, then the If an entity sells cash registers, then the cash registers it buys to re-sell would be cash registers it buys to re-sell would be inventory- ones used to ring-up sales for inventory- ones used to ring-up sales for the business would be recorded as the business would be recorded as equipmentequipment

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RevieRevieww

Which of the following statements about a Which of the following statements about a periodicperiodic inventory system is inventory system is truetrue??

a. Cost of goods sold is determined only at the a. Cost of goods sold is determined only at the end of the accounting period.end of the accounting period.

d.d. The increased use of computerized systems The increased use of computerized systems has increased the use of the periodic system.has increased the use of the periodic system.

c.c. The periodic system provides better control The periodic system provides better control over inventories than a perpetual systemover inventories than a perpetual system..

bb. Detailed records of the cost of each . Detailed records of the cost of each inventory purchase and sale are maintained inventory purchase and sale are maintained continuously.continuously.

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RevieRevieww

Which of the following statements about a Which of the following statements about a periodicperiodic inventory system is inventory system is truetrue??

a. Cost of goods sold is determined only at the a. Cost of goods sold is determined only at the end of the accounting period.end of the accounting period.

d.d. The increased use of computerized systems The increased use of computerized systems has increased the use of the periodic system.has increased the use of the periodic system.

c.c. The periodic system provides better control The periodic system provides better control over inventories than a perpetual systemover inventories than a perpetual system..

bb. Detailed records of the cost of each . Detailed records of the cost of each inventory purchase and sale are maintained inventory purchase and sale are maintained continuously.continuously.

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Recording SalesRecording Sales Sales revenues recorded Sales revenues recorded

when goods are transferred when goods are transferred from the seller to the buyerfrom the seller to the buyer

Follows revenue recognition Follows revenue recognition principleprinciple

Every purchase should be Every purchase should be supported by business supported by business documents, i.e., cash documents, i.e., cash register tape or sales invoiceregister tape or sales invoice

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Recording Sales Recording Sales

Accounts Receivable 3,800

Sales 3,800

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Sales Returns and AllowancesSales Returns and Allowances

Sales ReturnSales Return – A return of the goods – A return of the goods from the buyer for cash or creditfrom the buyer for cash or credit..

Sales AllowanceSales Allowance – A reduction made in – A reduction made in the selling price of the merchandise, the selling price of the merchandise, granted by the seller so that the buyer granted by the seller so that the buyer will keep the goods.will keep the goods.

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Sales Returns and AllowancesSales Returns and Allowances Is a contra-revenue account, normal Is a contra-revenue account, normal

balance is debitbalance is debit Are kept in this separate account so Are kept in this separate account so

you know exactly how much you you know exactly how much you allowed in returns and allowancesallowed in returns and allowances

SalesSales $ 2,500,000$ 2,500,000

Returns and AllowancesReturns and Allowances 25,000 25,000

Net SalesNet Sales $ 2,475,000 $ 2,475,000

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Sales Returns and Sales Returns and AllowancesAllowances

Inferior merchandiseInferior merchandise Inefficiencies in filling ordersInefficiencies in filling orders Errors in billing customersErrors in billing customers Mistakes in delivery or shipment of goodsMistakes in delivery or shipment of goods Overly aggressive sales clerksOverly aggressive sales clerks

What do excessive returns and allowances suggest?What do excessive returns and allowances suggest?

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Sales Returns and AllowancesSales Returns and Allowances

Sales Returns and Allowances 300 Accounts Receivable 300 To record a sales return of $300

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Sales DiscountsSales Discounts Credit terms may allow buyer to claim Credit terms may allow buyer to claim

a cash discount for prompt paymenta cash discount for prompt payment Sales Discount is a contra-revenue Sales Discount is a contra-revenue

account of sales. Normal debit balance.account of sales. Normal debit balance.

Credit terms 2/10,n/30- Seller’s BooksCredit terms 2/10,n/30- Seller’s Books

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Single-step and and Single-step and and Multiple-step Income Multiple-step Income StatementsStatements

Single-stepSingle-step – total revenues minus – total revenues minus total expenses; simple, easy to readtotal expenses; simple, easy to read

Multi-stepMulti-step – highlights components – highlights components and distinguishes activities and distinguishes activities

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Single-step Income Single-step Income StatementStatement

Multi-step Income Multi-step Income StatementStatement

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Cost of Goods Sold Cost of Goods Sold Enter beginning inventoryEnter beginning inventory

Add units or $ amount of Add units or $ amount of purchasespurchases

Subtract ending inventory Subtract ending inventory

Units bought Units bought 1,2501,250

250250

Cost of Goods (Units) Cost of Goods (Units) Available for SaleAvailable for Sale

1,2501,250

In Units (not $) 0In Units (not $) 0

Cost of Goods or Number of Units SoldCost of Goods or Number of Units Sold

1,000 1,000

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Recording Merchandise Recording Merchandise TransactionsTransactions

At the date of sale, no cost of At the date of sale, no cost of merchandise sold is recordedmerchandise sold is recorded

Physical count taken at period end to Physical count taken at period end to determine cost of ending inventory, determine cost of ending inventory, and therefore cost of goods soldand therefore cost of goods sold

Record purchase returns and Record purchase returns and allowances, purchase discounts, and allowances, purchase discounts, and freight-in costs in separate accountsfreight-in costs in separate accounts

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Purchase Returns and Purchase Returns and AllowancesAllowances

Purchase ReturnPurchase Return – A return of the – A return of the goods from the buyer or seller for cash goods from the buyer or seller for cash or creditor credit..

Purchase AllowancePurchase Allowance – A reduction – A reduction made in the selling price of the made in the selling price of the merchandise, granted by the seller so merchandise, granted by the seller so that the buyer will keep the goods.that the buyer will keep the goods.

Flip side of Sales Returns and Allowances

Return of MerchandiseReturn of MerchandiseSauk Stereo returned goods costing $ 300 to PW Audio.Sauk Stereo returned goods costing $ 300 to PW Audio.

Debit CreditDebit Credit

May 8 May 8 Accounts Payable Accounts Payable 300 300 Purchase Returns and Allowances Purchase Returns and Allowances 300 300

To record return of goods purchased on accountTo record return of goods purchased on account

300300

Accounts Accounts PayablePayable

Purchase Returns Purchase Returns and Allowancesand Allowances

May 8 May 8 May 8May 8 3003003,8003,800May 4May 4 May 4May 4 3,8003,800

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Freight Costs… On incoming goods you purchase

are charged to inventory.

On outgoing goods you sell are an operating expense to the seller.

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Freight Cost Incurred by BuyerFreight Cost Incurred by Buyer

Debit CreditDebit Credit

May 9 Freight-in May 9 Freight-in 150 150 Cash Cash 150 150

To record payment of freight on goods purchased To record payment of freight on goods purchased

Freight-inFreight-in

3,8003,800May 4May 4 May 8May 8May 9May 9 150150

CashCash

May 9May 9 150150

Freight Cost Incurred by SellerFreight Cost Incurred by Seller

300300

150150Freight-outFreight-out

May 4May 4CashCash

May 4May 4 150150

Debit CreditDebit Credit

May 9 Freight-Out 150 May 9 Freight-Out 150 Cash 150 Cash 150 To record payment of freight on goods sold To record payment of freight on goods sold

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Purchase DiscountsPurchase Discounts Credit terms may allow buyer to Credit terms may allow buyer to

claim a cash discount if payment is claim a cash discount if payment is made within a certain specified timemade within a certain specified time

Purchaser saves money and seller Purchaser saves money and seller converts account receivable to cash converts account receivable to cash fasterfaster

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Purchase DiscountsPurchase DiscountsCredit terms may be written“2/10, net 30” Credit terms may be written“2/10, net 30”

which means 2% cash discount if paid which means 2% cash discount if paid within 10within 10 days of invoice date, otherwise days of invoice date, otherwise pay the full amount within 30 dayspay the full amount within 30 days

What does “1/10, EOM” means? What does “1/10, EOM” means?

1% cash discount if paid within 10 days, 1% cash discount if paid within 10 days, otherwise pay by the end of the monthotherwise pay by the end of the month

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Invoice Invoice datedate

Credit Credit termsterms

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Purchase DiscountsPurchase Discounts

Original Invoice $3,800Original Invoice $3,800

Return on May 8 Return on May 8 -300 -300

Amount due before discount $3,500Amount due before discount $3,500

2% discount2% discount -70-70

Net due $3,430Net due $3,430

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Purchase DiscountsPurchase Discounts

Debit CreditDebit Credit

May 14 Accounts Payable 3,500 May 14 Accounts Payable 3,500 Cash 3,430 Cash 3,430 Purchase Discounts Purchase Discounts

70 70

To record payment within discount period To record payment within discount period

CashCashAccounts Accounts PayablePayable

May 14May 14 3,5003,500 3,4303,430May 14May 143,8003,800

Purchase Purchase DiscountsDiscounts

May 4May 4 May 8May 8 300300May 9May 9 150150 May 14May 14 7070

To summarize

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Sale of MerchandiseSale of Merchandise

Sales Returns and AllowancesSales Returns and Allowances

Sales DiscountsSales Discounts

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Purchase of MerchandisePurchase of Merchandise

Purchase Returns and AllowancesPurchase Returns and Allowances

Freight-CostsFreight-Costs

Purchase DiscountsPurchase Discounts

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ReviewReviewA purchase of $1,200 is made on March 2, terms 2/10, A purchase of $1,200 is made on March 2, terms 2/10, n/30, on which a return of $200 is granted on March 5. n/30, on which a return of $200 is granted on March 5.

What amount should be paid on March 12?What amount should be paid on March 12?

a.a. $1,176$1,176

d.d. $ 980$ 980

c.c. $1,000$1,000

b.b. $1,200$1,200

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ReviewReviewA purchase of $1,200 is made on March 2, terms 2/10, A purchase of $1,200 is made on March 2, terms 2/10, n/30, on which a return of $200 is granted on March 5. n/30, on which a return of $200 is granted on March 5.

What amount should be paid on March 12?What amount should be paid on March 12?

a.a. $1,176$1,176

d.d. $ 980$ 980

c.c. $1,000$1,000

b.b. $1,200$1,200

$1,200-$200= $1,000- $20 ($1,000 x .02) = $ 980$1,200-$200= $1,000- $20 ($1,000 x .02) = $ 980

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ReviewReviewIf sales revenues are $400,000, cost of goods If sales revenues are $400,000, cost of goods sold is $310,000, and the operating expenses sold is $310,000, and the operating expenses are $60,000, what is the gross profit?are $60,000, what is the gross profit?

a.a. $ 30,000$ 30,000

d.d. $400,000$400,000

c.c. $340,000$340,000

b.b. $ 90,000$ 90,000

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ReviewReviewIf sales revenues are $400,000, cost of goods If sales revenues are $400,000, cost of goods sold is $310,000, and the operating expenses sold is $310,000, and the operating expenses are $60,000, what is the gross profit?are $60,000, what is the gross profit?

a.a. $ 30,000$ 30,000

d.d. $400,000$400,000

c.c. $340,000$340,000

b.b. $ 90,000$ 90,000

$ 400,000-$ 310,000 = $90,000$ 400,000-$ 310,000 = $90,000

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Calculating Cost of Goods Calculating Cost of Goods Sold Sold

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ReviewReviewIf beginning inventory is $60,000, cost of If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending goods purchased is $380,000, and ending inventory is $50,000, what is cost of good inventory is $50,000, what is cost of good sold under the periodic system?sold under the periodic system?

a.a. $390,000$390,000

d.d. $420,000$420,000

c.c. $330,000$330,000

b.b. $370,000$370,000

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ReviewReviewIf beginning inventory is $60,000, cost of If beginning inventory is $60,000, cost of goods purchased is $380,000, and ending goods purchased is $380,000, and ending inventory is $50,000, what is cost of good inventory is $50,000, what is cost of good sold under the periodic system?sold under the periodic system?

a.a. $390,000$390,000

d.d. $420,000$420,000

c.c. $330,000$330,000

b.b. $370,000$370,000

$60,000 +$380,000- $50,000= $390,000$60,000 +$380,000- $50,000= $390,000

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ReviewReviewWhich of the following would affect the Which of the following would affect the

gross profit rate (assuming sales are gross profit rate (assuming sales are constant)?constant)?

a.a. An increase in advertising expense.An increase in advertising expense.

d.d. A decrease in insurance expense.A decrease in insurance expense.

c.c. An increase in cost of goods sold.An increase in cost of goods sold.

b.b. A decrease in depreciation expense.A decrease in depreciation expense.

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NEIMAN FIELDS DEPARTMENT STOREIncome Statement (Partial)

For the Year Ended December 31, 2007

Sales revenuesSales $727,000Less: Sales returns andallowances 8,000Net sales $719,000

Cost of goods soldInventory, January 1 $ 40,500Purchases $446,000Less: Purchase discounts. $12,000

Purchases returnsand allowances 6,400 18,400

Net purchases $427,600Add: Freight-in 5,600Cost of goods purchased 433,200Cost of goods available for

sale 473,700Inventory, December 31 71,000

Cost of goods sold 402,700Gross profit $316,300

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Evaluating ProfitabilityEvaluating Profitability

• Gross Profit RateGross Profit Rate

• Profit Margin RatioProfit Margin Ratio

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Gross Profit RateGross Profit Rate

Gross ProfitGross Profit

Net SalesNet Sales==

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ReviewReviewWhich of the following would affect the Which of the following would affect the

gross profit rate (assuming sales are gross profit rate (assuming sales are constant)?constant)?

a.a. An increase in advertising expenseAn increase in advertising expense..

d.d. A decrease in insurance expense.A decrease in insurance expense.

c.c. An increase in cost of goods sold.An increase in cost of goods sold.

b.b. A decrease in depreciation expenseA decrease in depreciation expense..

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Reasons Gross Profits Rates Reasons Gross Profits Rates ChangeChange

•Selling products with a lower “mark-up” Selling products with a lower “mark-up”

• Increased competition can lower sale pricesIncreased competition can lower sale prices

•Paying higher prices to suppliersPaying higher prices to suppliers

•Sales MixSales Mix

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Profit Margin RatioProfit Margin Ratio

Net IncomeNet Income

Net SalesNet Sales==

Percentage of “mark-up” on Percentage of “mark-up” on merchandise sold alters this merchandise sold alters this percentagepercentage

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Evaluate Profits MarginsEvaluate Profits Margins

Gross Profit Rates by IndustryGross Profit Rates by Industry

Profit Margin Rates by IndustryProfit Margin Rates by Industry

In addition to In addition to computing the computing the company’s company’s gross profit and gross profit and profit margin profit margin rates, you rates, you should should compare to compare to industry industry averagesaverages