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PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA
McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter 05
ACCOUNTING FOR MERCHANDISING OPERATIONS
5 - 2
Service organizations sell time to earn revenue.
Examples: Accounting firms, law firms and
plumbing services
SERVICE COMPANIES C 1
5 - 3
Manufacturer Wholesaler Retailer Consumers
Merchandising Companies
MERCHANDISER C 1
5 - 4
REPORTING INCOME FOR A MERCHANDISER
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
C 1
5 - 5
OPERATING CYCLE FOR A MERCHANDISER
Begins with the purchase of merchandise and ends with the collection of cash from the
sale of merchandise.
C 2
5 - 6
INVENTORY SYSTEMS C 2
5 - 7
Perpetual systems continually update
accounting records for merchandising transactions
Periodic systems accounting records
relating to merchandise transactions are updated only at the end of the accounting period
C 2
INVENTORY SYSTEMS
5 - 8
MERCHANDISE PURCHASES
On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.
P1
5 - 9
TRADE DISCOUNTS Used by manufacturers and wholesalers
to offer better prices for greater quantities purchased.
Example Z-Mart offers a 30% trade
discount for orders of 1,000 units or more on its popular
product Racer. Each Racer has a list price of $5.25.
Quantity sold 1,000 Price per unit 5.25$ Total 5,250 Less 30% discount (1,575) Invoice price 3,675$
P1
5 - 10
P1 ACCOUNTING FOR MERCHANDISE PURCHASES
5 - 11
PURCHASE DISCOUNTS
A deduction from the invoice price granted to induce early payment of the amount due.
P1
5 - 12
2/10,n/30 Discount Percent
Number of Days
Discount Is Available
Otherwise, Net (or All) Is Due in 30
Days
Credit Period
PURCHASE DISCOUNTS P1
5 - 13
On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit
terms are 2/10, n/30.
PURCHASE DISCOUNTS P1
5 - 14
On November 12, Z-Mart paid the amount due on the purchase of November 2.
PURCHASE DISCOUNTS P1
5 - 15
PURCHASE DISCOUNTS
After we post these entries, the accounts involved look like these:
P1
5 - 16
PURCHASE RETURNS AND ALLOWANCES
Purchase Return . . . Merchandise returned by the purchaser to
the supplier. Purchase Allowance . . .
A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier.
P1
5 - 17
On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance
from Trex for defective merchandise.
PURCHASE RETURNS AND ALLOWANCES
P1
5 - 18
Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays
on June 11, it takes the 2% discount only on the $900 remaining balance.
PURCHASE RETURNS AND ALLOWANCES
P1
5 - 19
TRANSPORTATION COSTS AND OWNERSHIP TRANSFER
P1
5 - 20
TRANSPORTATION COSTS
Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is
$75.
P1
5 - 21
ACCOUNTING FOR MERCHANDISE P1
5 - 22
ACCOUNTING FOR MERCHANDISE SALES
P2
5 - 23
SALES OF MERCHANDISE P2
Each sales transaction for a seller of merchandise involves two parts:
Revenue received in the form of an asset
from a customer.
Recognition of the cost of merchandise sold to a customer.
5 - 24
On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a
cost basis to Z-Mart of $1,600.
SALES OF MERCHANDISE P2
5 - 25
SALES DISCOUNTS P2
Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future
collection efforts.
5 - 26
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
SALES DISCOUNTS P2
The account was paid in full within the 60-day period.
The account was paid in full within the 10-day discount period.
5 - 27
SALES RETURNS AND ALLOWANCES P2
Sales returns and allowances usually involve dissatisfied customers and the possibility of
lost future sales.
Sales returns refer to merchandise that customers return to
the seller after a sale.
Sales allowances refer to reductions in the selling price of
merchandise sold to customers.
5 - 28
Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of
the merchandise. The returned items sell for $800 and cost $600.
SALES RETURNS AND ALLOWANCES P2
Sales Returns and Allowances is a Contra Account subtracted from sales Defective inventory valued at estimated value not its cost
5 - 29
Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer
decides to keep it because Z-Mart offers a $100 price reduction. Sales Allowance
SALES ALLOWANCES P2
5 - 30
MERCHANDISING COST FLOW IN THE ACCOUNTING CYCLE
Beginning inventory
Net purchases
Merchandise available for sale
Ending inventory
Cost of goods sold To Income Statement
To Balance Sheet
To Income Statement To Balance Sheet
Perio
d 1
Beginning inventory
Net purchases
Merchandise available for sale
Ending inventory
Cost of goods sold
Perio
d 2
P2
5 - 31
ADJUSTING ENTRIES FOR MERCHANDISERS
Z-Mart’s Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists.
P3
A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of
merchandise, including theft and deterioration.
Inventory Shrinkage difference of physical count and recorded inventory
5 - 32
CLOSING ENTRIES FOR MERCHANDISERS
P3
5 - 33
P4
A multiple-step income
statement format shows
detailed computations of net sales and other costs and
expenses, and reports
subtotals for various
classes of items.
5 - 34
SINGLE-STEP INCOME STATEMENT P4
5 - 35
CLASSIFIED BALANCE SHEET
Highly Liquid
Less Liquid
5 - 36
GLOBAL VIEW
Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance
for the accounting of merchandise purchases and sales.
Financial Statement Differences 1. Order of expenses 2. Separate disclosures 3. Presentation of expenses 4. Classification of operating and
nonoperating expenses 5. Alternative measures of income 6. Order of current and noncurrent
items on the balance sheet
5 - 37
A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
= Quick Assets Current Liabilities
Acid-Test Ratio
Acid-Test Ratio = Cash + S-T Investments + Receivables
Current Liabilities
ACID-TEST RATIO A1
5 - 38
Percentage of dollar sales available to
cover expenses and provide a profit.
Gross Margin Ratio
Net Sales - Cost of Goods Sold Net Sales =
GROSS MARGIN RATIO A2
5 - 39
JCPENNEY A1/A2
5 - 40
APPENDIX 5A: PERIODIC INVENTORY SYSTEM
P5
A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold.
(a)
(b)
(c)
(d)
(e)
(f)
(g)
5 - 41
APPENDIX 5A: PERIODIC INVENTORY SYSTEM
P5
5 - 42
APPENDIX 5B: WORKSHEET—PERPETUAL SYSTEM
P5
5 - 43
END OF CHAPTER 05