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Copyright © 2016 by McGraw-Hill Education
Chapter 6Merchandising Operations and the Multistep Income Statement
PowerPoint Author:Brandy Mackintosh, CA
6-2
Learning Objective 6-1
Distinguish between service and merchandising operations.
6-3
Operating Cycles
6-4
Operating Cycles
(in thousands) (in millions)
(in thousands) (in millions)
6-5
Learning Objective 6-2
Explain the differences between periodic and
perpetual inventory systems.
6-6
-
= Gross Profit
Inventory SystemsThree accounts are particularly important to
a merchandiser:
Inventory The merchandiser’s total cost of acquiring goods that it has not yet sold
Total selling price of all goods that the merchandiser did sell to customers
Total cost of all goods that the merchandiser did sell to customers
Sales Revenue
Cost of Goods Sold
6-7
Inventory Systems
BI + P – EI = CGS or BI + P – CGS = EI $4,800 + 10,200 – 6,000 = $9,000 $4,800 + 10,200 – 9,000 = $6,000
6-8
Periodic Inventory SystemA periodic inventory system updates the inventory records for merchandise purchases,sales, and returns only at the end of the accounting period.
To determine how much inventory is on hand and how much inventory has been sold, periodic systems require that inventory be physically counted by the employees at the end of the period.
BI + P – EI = CGS
6-9
Perpetual Inventory System
In a perpetual inventory system, the inventory records are updated
“perpetually,” that is, every time inventory is bought,
sold, or returned.
Perpetual systems often are combined with bar codes and
optical scanners.
6-10
Inventory Control
Perpetual Inventory System
Can Estimate
Shrinkage
Periodic Inventory System
No Up-to-Date Records
Can’t Estimate
Shrinkage
Continuous Tracking
6-11
Learning Objective 6-3
Analyze purchase transactions under a perpetual inventory
system.
6-12
Recording Inventory Purchases
We will now look at the accounting for inventory purchases, as well as
transportation costs, purchase returns and allowances, and purchase
discounts. We will record all inventory-related transactions in the Inventory
account.
6-13
Inventory Purchases
Walmart receives $10,500 of bikes purchased on account.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Inventory +$10,500 AccountsPayable +$10,500
2 Record
Inventory Accounts Payable 10,500
10,500
6-14
Transportation Cost
Walmart pays $400 cash to a trucker who delivers the$10,500 of bikes to one of its stores.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Cash -$400Inventory +$400
2 Record
Inventory Cash 400
400
6-15
Purchase Returns and Allowances
Walmart returned some of the bikes to thesupplier and received a $500 reduction in the balance owed.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Inventory -$500 AccountsPayable -$500
2 Record
Accounts Payable Inventory 500
500
6-16
Purchase Discounts
Walmart’s bike purchase for $10,500 had terms of 2/10, n/30. Recall that Walmart returned inventory costing $500
and received a $500 reduction in its Accounts Payable. Walmart paid within the discount period.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Cash -$9,800Inventory -$200
AccountsPayable -$10,000
2 Record
Accounts Payable Cash Inventory
9,800200
10,000
6-17
Summary of Inventory Transactions
6-18
Learning Objective 6-4
Analyze sales transactions under a perpetual inventory
system.
6-19
Recording Inventory Sales
Merchandisers earn revenues by transferring control of merchandise to a customer, either for
cash or on credit.
For a merchandiser who is shipping goods to a customer, the transfer of control occurs at one of two possible times:1. FOB shipping point —the sale is recorded when the
goods leave the seller’s shipping department.2. FOB destination —the sale is recorded when the
goods reach their destination (the customer).
6-20
Recording Inventory Sales
Every merchandise sale has two components, each of which requires an entry in a perpetual
inventory system.Selling Price
Cost
6-21
Recording Inventory SalesWalmart sells two Schwinn mountain bikes at a selling price of
$200 per bike, for a total of $400 cash. The bikes had previously been recorded in Walmart’s Inventory at a cost of
$175 per bike, for a total cost of $350.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Cash +$400Inventory -$350
Sales Revenue +$400Cost of Goods Sold -$350
2 Record
Cash Sales Revenue Cost of Goods Sold Inventory
400
350
400
350
6-22
Sales Returns and Allowances
When goods sold to a customer arrive in damaged condition or are otherwise
unsatisfactory, the customer can (1) return them for a full refund or
(2) keep them and ask for a reduction in the selling price, called an allowance.
6-23
Sales Returns and AllowancesSuppose that after Walmart sold the two Schwinn mountain bikes, the customer returned one to Walmart. Assuming that
the bike is still like new, Walmart would refund the $200 selling price to the customer and take the bike back into inventory.
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Cash -$200
Inventory +$175
Sales Returns and Allowances (+xR) -$200Cost of Goods Sold +$175
2 Record
Sales Returns & Allowances (+xR) Cash Inventory Cost of Goods Sold
200
175
200
175
6-24
Sales on Account and Sales DiscountsSuppose Walmart’s warehouse store (Sam’s Club) sells
printer paper on account to a local business for $1,000 with payment terms of 2/10, n/30. The paper had cost Sam’s Club
$700.
2 Record
Accounts Receivable Sales Revenue Cost of Goods Sold Inventory
1,000
700
1,000
700
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Accounts Receivable+$1,000Inventory -$700
Sales Revenue +$1,000Cost of Goods Sold -$700
6-25
2 Record
Cash Sales Discounts (+xR) Accounts Receivable 1,000
98020
Sales on Account and Sales DiscountsTo take advantage of this 2% discount, the customer must pay Walmart within 10 days. If the customer does so, it will deduct the $20 discount (2% $1,000) from the total owed ($1,000),
and then pay $980 to Walmart.
(2% × $1,000)
1 AnalyzeLiabilitiesAssets = Stockholders’ Equity+
Cash +$980Accounts Receivable -$1,000
Sales Discounts (+xR) -$20
6-26
Summary of Sales-Related Transactions
The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.
6-27
Learning Objective 6-5
Prepare and analyze a merchandiser’s multistep
income statement.
6-28
Multistep Income Statement
6-29
Gross Profit Analysis
GrossProfit %
=Gross ProfitNet Sales
× 100
6-30
Comparing Gross Profit Percentages
Copyright © 2016 by McGraw-Hill Education
Supplement 6A
Recording Inventory Transactions in a Periodic System
6-32
Learning Objective 6-S1
Record inventory transactions in a periodic system.
6-33
Recording Inventory Transactions in a Periodic System
Jan. 1 Beginning inventory: 80 units at a cost of $60.Apr. 14 Purchased 170 additional units on account at a cost of $60.Nov. 30 Sold 150 units on account at a unit sales price of $80.Dec. 31 Counted 100 units at a unit cost of $60.
An electronics retailer stocks and sells just one item and the following events occurred:
We will record these events assuming the company usesa periodic inventory system and then compare the
periodic inventory system to a perpetual inventory system.
6-34
Recording Inventory Transactions in a Periodic System
Periodic Inventory System Perpetual Inventory System
6-35
Recording Inventory Transactions in a Periodic System
Periodic Inventory System
BI + P – EI = CGS
End-of-year adjustment entries are not required using a perpetual inventory system.
6-36
Recording Inventory Transactions in a Periodic System
Summary of the Effects on the Accounting Equation
Copyright © 2016 by McGraw-Hill Education
Chapter 6Solved Exercises
M6-2, M6-16, E6-3, E6-5, E6-13, E6-20
6-38
M6-2 Calculating Shrinkage in a Perpetual Inventory SystemCorey’s Campus Store has $4,000 of inventory on hand at the beginning of the month. During the month, the company buys $41,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $13,000 of inventory is on hand. How much shrinkage occurred during the month?
Beginning inventory Purchases Cost of Goods Sold Ending balance Inventory count Shrinkage
$ 4,000+41,000-30,00015,000
-13,000$ 2,000
6-39
M6-16 Interpreting Changes in Gross Profit PercentageLuxottica Group, the Italian company that sells Ray Ban and Oakley sunglasses, reported net sales of €7.1 billion in 2012 and €6.2 billion in 2011. Gross profit increased from €4.1 billion in 2011 to €4.7 billion in 2012. Was the increase in gross profit caused by (a) an increase in gross profit per sale, (b) an increase in sales volume, or (c) a combination of (a) and (b)?
Net SalesCost of Goods SoldGross Profit
Gross Profit Percentage
20116.22.14.1
66.1%
20127.12.44.7
66.2%
(in billions of euro)
6-40
E6-3 Identifying Shrinkage and Other Missing Inventory InformationCalculate the missing information for each of the following independent cases:
Case
A
B
C
D
Beg. Inventor
y
$100
200
150
260
Purchases
$700
800
500
600
Cost of Goods Sold
$300
850
200
650
Ending Inventory
(perpetual)
Ending Inventory
(As Counted)Shrinkage
$500
150
450
210
$420
150
440
200
$80
0
10
10
? ?
? ?
?? ?
6-41
E6-5 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for each of the following independent cases.
6-42
E6-5 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for each of the following independent cases.
$300
?
200
650
?
Case
A
B
C
D
E
Sales Revenue
$700
900
?
800
1,000
Beginning Inventory
$100
200
100
?
50
Purchases
$800
800
?
600
900
Cost of Goods
Available
Cost of Goods Sold
Cost of Ending
Inventory
$?
150
300
250
?
?
?
?
?
?
Gross Profit
$?
?
400
?
500
900 600 400
8501,000 50
500400600
150900300
500950 450
6-43
E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.
Jan. 6 Accounts Receivable Sales Revenue
Cost of Goods Sold Inventory
100
70
100
70
6-44
E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.
Jan. 6 Accounts Receivable Sales Revenue
Cost of Goods Sold Inventory
80
60
80
60
6-45
E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.
Jan. 14 Cash ($100 x 98%)Sales Discounts ($100 x 2%) Accounts Receivable 100
982
6-46
E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.
Feb. 2 Cash Accounts Receivable 80
80
6-47
E6-13 Recording Journal Entries for Net Sales with Credit Sales and Sales DiscountsUsing the information in E6-12, prepare journal entries to record the transactions, assuming Solitare uses a perpetual inventory system.
Jan. 6 Sold goods for $100 to Wizard Inc. with terms 2/10, n/30. The goods cost Solitare $70. 6 Sold goods to SpyderCorp for $80 with terms 2/10, n/30. The goods cost Solitare $60. 14 Collected cash due from Wizard Inc.Feb. 2 Collected cash due from SpyderCorp. 28 Sold goods for $50 to Bridges with terms 2/10, n/45. The goods cost Solitare $30.
Feb. 28 Accounts Receivable Sales Revenue
Cost of Goods Sold Inventory
50
30
50
30
6-48
E6-20 Inferring Missing Amounts Based on Income Statement RelationshipsSupply the missing dollar amounts for the income statement of Williamson Company for each of the following independent cases:
Sales RevenueSales Returns and AllowancesNet SalesCost of Goods SoldGross Profit
Case B
$ 6,000 500
5,500 4,050$ 1,450
Case A
$ 8,000 150
7,850 5,750$ 2,100
Case C
$ 6,195 275
5,920 5,400$ 520
6-49
End of Chapter 6