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CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 4-1
Responsibility Accounting for a Merchandising Business
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Financial statements
What are financial statements? Summary of the financial information that a business records
Why are financial statements important to a business? They are analyzed to determine business’s financial position Managers use them to make business decisions Used in preparing tax reports and other reports, such as
those required by the SEC How often are financial statements prepared?
At least once a year – depends on the needs of the business
2
LESSON 4-1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Fiscal period
The length of time for which a business summarizesand reports financial information (generally referred to as a year) Accounting Period Cycle concept – changes in financial
information are reported for a specific period of time in the form of financial statement
Zytech uses a calendar year
3
LESSON 4-1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Responsibility Accounting
Assigning control of business revenues, costs, and expenses is a responsibility of a specific manager
Features of a responsibility accounting system1. Each manager is assigned responsibility for only those
revenues, costs, and expenses for which the manager can make decisions and affect the outcome.
2. These revenues, costs, and expenses must be readily identifiable with the manager’s unit.
An income statement reports net income earned during a fiscal period, but this information is not broken down by department; therefore merchandising businesses often prepare departmental statements.
4
LESSON 4-1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Departmental Margin statement
Reports departmental Margin Total revenue earned by a department less its cost of merchandise sold and
less its direct expenses Direct expense
An operating expense identifiable with and chargeable to the operation of a specific department
Example – cost of supplies used by a specific department Indirect expense
An operating expense chargeable to overall business operations Example – cost of electricity (department manager would have little or no
control over the use of electricity in the department) Zytech’s departmental margin statements – pgs. 111/113 How does Zytech’s chart of accounts – pg. 3 - help to support it’s
reporting goals?
5
LESSON 4-1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
6
LESSON 4-1
RECORDING A DIRECT EXPENSE page 90
The advertising promotes the department’s sale of audio equipment; since the department manager controls the advertising expense and the department receives the benefits, the expense is a direct expense.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
7
LESSON 4-1
RECORDING AN INDIRECT EXPENSE page 90
Indirect expenses are reported on the income statement but not the departmental margin statements.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
8
LESSON 4-1
TERMS REVIEW
fiscal period responsibility accounting direct expense indirect expense departmental margin departmental margin statement
page 91
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 4-2
How do you prepare and interim Departmental Statement of Gross Profit?
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Departmental Statement of Gross Profit
Gross profit The amount of revenue from sales less the cost of goods sold
Why analyze departmental gross profit data? Managers can determine the amount of potential revenue remaining
after the cost of merchandise has been deducted from net sales and make any necessary adjustments
What kinds of adjustments may be necessary? Adjust merchandise selling prices Change suppliers of merchandise Add, delete, or change products Discontinue a department
Gross profit information reflects changes between costs and selling prices
10
LESSON 4-2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Determining Ending Merchandise Inventory
Beginning and ending inventory amounts are needed to prepare a departmental statement of gross profit
How can businesses keep track of inventory? Periodic/physical inventory
Merchandise inventory determined by counting, weighing, or measuring items on hand
Not always practical Perpetual inventory
Merchandise inventory determined by keeping a continuous record of increases, decreases, and balance on hand
Use of point-of-sale terminals or cash registers and barcodes on merchandise has made this type of inventory tracking common
11
LESSON 4-2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Determining Ending Merchandise Inventory
Gross Profit method of estimating inventory Use when a perpetual inventory is not kept and a periodic inventory is
not practical Inventory is estimated by using the previous year’s percentage of
gross profit on operations
12
LESSON 4-2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
13
LESSON 4-2
1. List beginning inventory.2. Determine net purchases.3. Calculate merchandise for sale.4. Determine net sales.
5. Calculate estimated gross profit.6. Calculate the estimated cost of
merchandise sold.7. Calculate estimated ending inventory.
ESTIMATING ENDING MERCHANDISE INVENTORY page 94
1
23
76
54
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-2
INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFIT page 95
Component percentage – shows the relationship between one financial statement item and the total that includes that item
-usually calculated on Cost of merchandise sold, gross profit on operations, total operating expenses, net income before federal income tax
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
15
LESSON 4-2
1. The cost of merchandise sold percentage:
2. The gross profit margin percentage:
.6076 or 60.8%=$42,186.47
$69,429.95
.3924 or 39.2%=$27,243.48
$69,429.95
COST OF MERCHANDISE SOLD AND GROSS PROFIT PERCENTAGES page 96
1
2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
How do you know if the component percentages are good or bad?
You must know the acceptable levels of performance Historical records provide percentages that can be compared across
time (significant changes should be investigated) Industry performance standards are also used for comparison
Published percentages – industry averages
Zytech should have a cost of merchandise sold percentage of 60% or less Analyze and comment on Zytech’s June performance
16
LESSON 4-2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
17
LESSON 4-2
TERMS REVIEW
gross profit departmental statement of gross profit periodic inventory perpetual inventory gross profit method of estimating an inventory component percentage
page 97
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 4-3
How do you prepare a Work Sheet for a Departmentalized Business?
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Proving the Accuracy of posting to the subsidiary ledgers
Schedule of accounts receivable Total of all accounts receivable ledger accounts - List of customer
accounts, account balances, and total amount due from all customers Total must equal the GL controlling account – Accounts Receivable
Schedule of accounts payable Total of all accounts payable ledger accounts – list of vendor
accounts, account balances, and total amount due to all vendors Total must equal the GL controlling account – Accounts Payable
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LESSON 4-3
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-3
PROVING THE ACCURACY OF POSTING TO SUBSIDIARY LEDGERS page 99
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Preparing an expanded worksheet Worksheet
A columnar accounting form used to summarize the general ledgerinformation needed to prepare financial statements
An expanded worksheet includes extra columns to sort information needed for departmental margin statements. (pgs. 102-103)
Trial Balance A proof of the equality of debits and credits in a general ledger Can be prepared at any time but should always be prepared as part of
the end-of-fiscal-period activities Accounts are listed in the same order they appear in the general
ledger All accounts are listed, regardless if there’s a balance or not Three income summary accounts are used Must be totaled and ruled
21
LESSON 4-3
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-3
pages 102-103DEPARTMENTAL WORK SHEET
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
23
LESSON 4-3
DEPARTMENTAL WORK SHEET pages 102-103
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Adjustments on a Worksheet with Departmental Margins
The adjustments column is used to update certain general ledger accounts (ie. Uncollectible accounts expense, supplies used) Not all GL accounts are up to date
24
LESSON 4-3
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-3
ADJUSTMENT INFORMATION page 104
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Uncollectible Accounts Expense Adjustment
What happens when a business sells merchandise on account, but the customer is unable to pay? It is important that these expenses be recorded in the fiscal period in
which the expenses contribute to earnings revenue (CONCEPT: Matching Expenses with Revenue) Indirect expense Recorded on lines 4 and 66 on worksheet and labeled (a) because it’s the
first adjustment recorded
Uncollectible Accounts Expense 2,109.40Allow. For Uncollectible Accts. 2,109.40
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LESSON 4-3
PercentageTotal Saleson Account
Estimated Uncollectible Accounts Expense× =
$210,940.00 × = $2,109.401%
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Merchandise Inventory Adjustment
Merchandise account balances on the trial balance are beginning inventory amounts for a fiscal period; a periodic inventory must be taken at the end of the year An adjustment must be made so that the balance on the worksheet
reflects the cost of merchandise reported on the periodic inventory Adjustment is made to the appropriate department’s merchandise
inventory account and income summary account (b)
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LESSON 4-3
Dec. 31 balance Beg. Bal (Trial Bal) Increase/decrease in Inv.Merch. Inv. – Audio - Merch Inv. – Audio = Adjustment Amt.$204,855.00 - $186,434.61 = $18,420.39
Merchandise Inventory – Audio $18,420.39Income Summary – Audio $18,420.39
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Supplies Adjustment The supplies account does not reflect the cost of any of the
supplies used during the year, which is an operating expense Periodic inventory determines amount of ending inventory A record is kept throughout the year of which departments use
the supplies, so that these adjustments can be recorded by department Adjustments are made to the appropriate Supplies Expense accounts
and the Supplies accounts (d), (e), (f)
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LESSON 4-3
Beg. Bal (Trial Bal) Dec. 31 balance Supplies usedSupplies – Admin. - Supplies – Admin. = (Adjustment Amt.)$6,973.00 - $4,051.00 = $2,922.00
Supplies Expense – Admin. $2,922.00Supplies – Admin. $2,922.00
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Prepaid Insurance Adjustment
Prepaid Insurance does not reflect the amount of insurance used during the year Adjustments made to Insurance Expense and Prepaid Insurance
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LESSON 4-3
Dec. 31 Bal (Trial Bal) Unexpired value Insurance usedPrepaid Insurance - Prepaid Insurance = (Adjustment Amt.)$9,850.00 - $4,200.00 = $5,650.00
Insurance Expense $5,650.00Prepaid Insurance $5,650.00
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Depreciation Expense Adjustments
Plant assets Assets that will be used for a number of years in the operation of a
business Decrease in value because of passage of time, use, and the availability
of new models Depreciation Expense
Portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life (operating expense)
Estimate – does not represent the actual decline in the value of an asset; instead it is a method of allocating the cost of an asset over the years it will be used to generate revenue
Adjustments made to Depreciation Expense and Accumulated Depreciation accounts
30
LESSON 4-3
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Federal Income Tax Expense Adjustment
Corporations anticipating federal income taxes of $500 or more are required to pay estimated taxes each quarter The actual income tax must be calculated at the end of each fiscal
year, and the appropriate adjustment must be made to Federal Income Tax Expense and Federal Income Tax Payable
After all adjustments have been made, the Adjustments columns are totaled, checked for equality, and ruled
Extend new balances to the appropriate columns and calculate Net Income/Loss
31
LESSON 4-3
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
32
LESSON 4-3
2. Write department loss in Income Statement Debit column.1. Write department loss in Departmental Margin Statement Credit column.
DEPARTMENTAL AND COMPANY LOSS ON A WORK SHEET
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page 109
1 2 3 4
3. Record company loss in Income Statement Credit column.4. Record company loss in Balance Sheet Debit column.5. Add description.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
33
LESSON 4-3
TERMS REVIEW
schedule of accounts receivable schedule of accounts payable work sheet trial balance plant assets depreciation expense
page 110
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 4-4
How do you prepare Responsibility Statements for a Merchandising Business?
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Responsibility Statements
Financial statements reporting revenue, costs, and directexpenses under a specific department’s control
Departmental Margin Statements Include information about operating revenue, cost of merchandise
sold, and the direct expenses associated with the respective department
Format is similar to income statement – difference is no indirectexpenses are included
Help department managers determine how revenue, costs, and direct expenses affect departmental results
35
LESSON 4-4
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
36
LESSON 4-4
1. Determine net sales for department.
2. Determine cost of merchandise sold for department.
3. Calculate gross profit.
4. Record direct expenses of the department.
5. Calculate the departmental margin.
DEPARTMENTAL MARGIN STATEMENT—AUDIO page 111
3
5
4
2
1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
COMPONENT PERCENTAGES ON DEPARTMENTAL MARGIN STATEMENTS
Helps management interpret information Managers research causes for changes in percentages
Decisions are made based on these findings
Departments typically have % goals
37
LESSON 4-4
Net SalesDepartmental Margin
Component Percentage for Departmental Margin÷ =
$49,222.61 ÷ = 14.3%$344,476.46
Component Percentages20X3 20X2 20X1
Departmental Margin 14.3% 13.4% 13.1%
page 112
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
38
LESSON 4-4
DEPARTMENTAL MARGIN STATEMENT—VIDEO page 113
1. Determine net sales for department.
2. Determine cost of merchandise sold for department.
3. Calculate gross profit.
4. Record direct expenses of the department.
5. Calculate the departmental margin.
3
5
4
2
1
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Income Statement
Financial statement showing revenue and expenses for a fiscal period Includes revenue, gross profit, expenses, and net income/loss Summary information for each department is included Component percentages are included
39
LESSON 4-4
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-4
INCOME STATEMENT WITH DEPARTMENTAL MARGIN
1
9
1. Prepare the heading.
2-6. Use information from the departmental margin statements.
7. Use information from the Income Statement columns of the work sheet.
8. Complete the income statement.
9. Calculate component percentages.
page 114
7
8
2-6
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
STATEMENT OF STOCKHOLDERS’ EQUITY
Financial statement that shows changes in a corporation’s ownership for a fiscal period1. Capital stock – total shares of ownership in a corporation2. Retained earnings – an amount earned by a corporation and not yet
distributed to stockholders3. Dividends – earnings distributed to stockholders
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LESSON 4-4
page 115
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Balance Sheet
Financial statement that reports assets, liabilities, and owner’s equity on a specific date Snapshot showing what a business owns, owes, and is worth on a
given day Information comes from balance sheet columns of worksheet and
statement of stockholder’s equity Represents the accounting equation (A = L + OE)
Plant assets vs. Current assets Classified based on length of time assets will be in use
Current assets – assets expected to be exchanged for cashor consumed within a year
Plant assets - assets that will be used for a number of yearsin the operation of the business
42
LESSON 4-4
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
45
LESSON 4-4
TERMS REVIEW
responsibility statements income statement statement of stockholders’ equity capital stock retained earnings dividends balance sheet
page 117
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
LESSON 4-5
End-of-Period Work for a Departmentalized Business
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Adjusting Entries
Journal entries recorded to update general ledger accountsat the end of a fiscal period
Use information from the Adjustments column of the worksheet; letters provide the order for the entries
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
48
LESSON 4-5
2. Enter the adjusting entries without additional explanation.
JOURNALIZING ADJUSTING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 118
1. Write Adjusting Entries in the Account Title column.
1
2
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
Closing Entries
Journal entries used to prepare temporary accounts for a new fiscal period
Information is obtained from the Departmental MarginStatements and the Income Statement columns of the work sheet
Four closing entries1. I/S accounts with credit balances (revenue and contra cost accts.)2. I/S accts. with debit balances (cost, expense, and contra revenue
accts.)3. Record net income or net loss in the retained earnings account and
to close Income Summary account4. Dividends account
49
LESSON 4-5
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
50
LESSON 4-5
JOURNALIZING CLOSING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 119
1
1. Write Closing Entries in Account Title column.2. Record entry to close income statement accounts with
credit balances.3. Write (continued on general journal page 15) to show
that the closing entries are continued.
2
3
A journal entry should not be split between two pages.
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
51
LESSON 4-5
JOURNALIZING CLOSING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 120
4. Write Closing Entries (continued)in the Account Title column.
5. Record entry to close income statement accounts with debit balances.
6. Record entry to close Income Summary to Retained Earnings.
7. Record entry for Dividends.
4
5
67
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
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LESSON 4-5
POST-CLOSING TRIAL BALANCE FOR A DEPARTMENTALIZED BUSINESS page 122
Post-closing trial balance –prepared after the closingentries are posted to ensure that debits equal credits in the general ledger accounts
CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning
53
LESSON 4-5
2. Record entries in journals.
SUMMARY OF ACCOUNTING CYCLE page 123
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2
3
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67
8
93. Post journal entries to the ledgers.
9. Prepare a post-closing trial balance.
8. Journalize and post adjusting and closing entries.
7. Prepare financial statements.
6. Prepare a trial balance on the work sheet.
5. Prepare schedules of accounts receivable and accounts payable from the subsidiary ledgers.
4. Prepare interim departmental statement of gross profit.
1. Verify source documents for accuracy.