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Chapter 4

Reporting and Analyzing

Merchandising Operations

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Conceptual Learning Objectives

C1: Describe merchandising activities andidentify income components for amerchandising company

C2: Identify and explain the inventory asset of a merchandising company

C3: Describe both perpetual and periodicinventory systems

C4: Analyze and interpret cost flows andoperating activities of a merchandisingcompany

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Analytical Learning Objectives

A1: Compute the acid-test ratio and

explain its use to assess liquidity A2: Compute the gross margin ratio and

explain its use to assess profitability

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P rocedural Learning Objectives

P 1: Analyze and record transactions for merchandisepurchases using a perpetual system

P 2: Analyze and record transactions for merchandisesales using a perpetual system

P 3: P repare adjustments and close accounts for amerchandising company

P 4: Define and prepare multiple-step and single-step

income statementsP5 : Appendix 4A: Record and compare merchandising

transactions using both periodic and perpetualinventory systems

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Merchandising Activities

Examples: Accounting firms, law firms andExamples: Accounting firms, law firms andplumbing servicesplumbing services

Service organizationsService organizations sell timesell time totoearn revenue.earn revenue.

Examples: Accounting firms, law firms andExamples: Accounting firms, law firms andplumbing servicesplumbing services

Revenues ExpensesMinus Net

income

Equals

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Ma nuf a cturer Wholes a ler Ret a iler Customer

M erch a ndising Comp a niesM erch a ndising Comp a nies

Merchandising ActivitiesC 1

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Reporting Income of aMerchandiser

Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts stores

Cost of Goods Sold

GrossProfit

Expenses NetIncome

NetSales

Minus Equals Minus Equals

M erch a ndising Comp a nyIncome St a tement

For Ye a r Ended December 31, 2010

Net s a les 150,000$Cost of goods sold 80,000 Gross profit 70,000$Oper a ting expenses 46,500 Net income 23,500$

C1

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Operating Cycle for aMerchandiser

Begins with the purchase of merchandise and ends withthe collection of cash from the sale of merchandise.

P urchas e s

Me rchandis e

inv e nto ry

Cr e di t sal e s

Acco

unt

r e ce ivabl e

Cashco lle ct io n

P urchas e s

Me rchandis e

inven

tory

Cashsal e s

Ca sh S a leCa sh S a le Credit Sa

leCredit Sa

le

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Inventory Systems

+

+

Beginninginventory

Net cost of purchases

Merchandise

available for sale

Ending inventory Cost of goodssold

==

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T rade Discounts

Used by manufacturers and wholesalersUsed by manufacturers and wholesalersto offer better prices for greater to offer better prices for greater

quantities purchased.quantities purchased.

Ex a mpleEx a mpleMa

trix, Inc. offersa

30% tr a

deMa

trix, Inc. offersa

30% tr a

dediscount on orders of 1,000discount on orders of 1,000units or more of their popul a r units or more of their popul a r

product R a cer. E a chproduct R a cer. E a chRa cer h a s a list price of $5.25.Ra cer h a s a list price of $5.25.

Qu a ntity sold 1,000 Price per unit 5.25$Tot a l 5,250 Less 30% discount (1,575) Invoice price 3,675$

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M ain Source, Inc. Invoice614 Tech Avenue Da te Number Nashville, TN 37651 5/4/10 358-BI

Sold To

Na me: B a rbee, Inc.Attn: Tom BellAddress: One Willow Pl aza Cookeville, Tennessee38501

P.O. 167 S a les: 25 Terms 2/10,n/30 Ship: FedEx Prep a idItem Description Qu a nity Price AmountAC417 250 B a ckup System 500 54.00$ 27,000$

Sub Tot a l 27,000 We a ppreci a te your business! Ship Chg. -

Ta x - Tot a l 27,000$

Invoice

Seller Invoice d a tePurch a ser Order number Credit termsFreight termsGoodsInvoice a mount

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P urchase Discounts

A deduction from the invoice price granted to induceearly payment of the amount due.

Terms

Time

Due

Discount Period

Due: Invoiceprice minus

discount

CreditPeriod

Due: Full Invoice Price

Date of Date of InvoiceInvoice

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2/10,n/30

P urchase Discounts

DiscountPercent

Number of Da ys

Discount IsAva ila ble

Otherwise,Net (or All)

Is Due in 30Da ys

CreditPeriod

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P urchase Discounts

On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, creditterms are 2/10, n/30.

Dr. Cr.M erch a ndise Inventory 27,000

Accounts P a y a ble 27,000 Purchase merchandise on account

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P urchase Discounts

On May 1 5 , Jason, Inc. paid the amount dueon the purchase of May 7.

Dr. Cr.Ma y 15 Accounts P a y a ble 27,000

C a sh 26,460 M erch a ndise Inventory* 540

Pa id a ccounts paya ble in ful l

*$27,000 2% = $540 discount

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P urchase Discounts

After we post these entries, theaccounts involved look like this:

Merchandise Inventory Accounts P ayable5/7 27,000 5/7 27,0005/15 540 5/15 27,000

Ba l. 26,460 Ba l. 0

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W hen Discount is Not T aken

If we fail to take a 2/10, n/30discount, is it really expensive?

365 days 20 days 2% = 36.5% a nnu a l r a te

Da ysin aye a r

Number of a ddition a ld a ys before

p a yment

Percentp a id to

keepmoney

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P urchase Returns and Allowances

P urchase Return . . .

Merchandise returned by the purchaser to thesupplier.

P urchase Allowance . . . A reduction in the cost of defective merchandise

received by a purchaser from a supplier.

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P urchase Returns and Allowances

On May 9, Matrix, Inc. purchased $20,000of merchandise inventory on account,

credit terms are 2/10, n/30.

Ma y 9 M erch a ndise Inventory 20,000 Accounts P a ya ble 20,000

Purchased merchandise on account

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P urchase Returns and Allowances

On May 10, Matrix, Inc. returned $ 5 00 of defectivemerchandise to the supplier.

Dr. Cr.Ma y 10 Accounts P a ya ble 500

Merch a ndise Inventory 500 Returned defective merchandise

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P urchase Returns and Allowances

On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.

Purch a se 20,000$Returns (500) Amount Due 19,500 Discount (390) Ca sh P a id 19,110$

Dr. Cr.Ma y 18 Accounts P a y a ble 19,500 C a sh 19,110 M erch a ndise Inventory 390

Pa i d account i n full

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T ransportation Costs

FOB shipping point(buyer p a ys)

FOB destin a tion(seller p a ys)Merchandise

Seller Buyer

Terms

Ownership tr a nsfers

to buyer when goodsa re pa ssed to

Tr a nsporta tioncosts pa id by

FOB shipping point Ca rrier Buyer FOB destina tion Buyer Seller

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T ransportation Costs

On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also

paid $100 transportation costs.Dr. Cr.

Ma y 12 Merch a ndise Inventory 8,100 Ca sh 8,100

Paid for merchandise and transportation

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Q uick Check

On July 6, 2010, Seller Co. sold $7, 5 00 of merchandise to Buyer,Co. on account; terms of 2/10,n/30. T he shipping terms were FOBshipping point. T he shipping cost was $100. W hich of thefollowing will be part of Buyers July 6 journal entry?

a. Credit Sales $7, 5 00b. Credit P urchase Discounts $1 5 0c. Debit Merchandise Inventory $7,600d. Debit Accounts P ayable $7,4 5 0

FOB shipping point indic a tes the buyer ultim a tely p a ys the freight. This is recorded with

a debit to M erch a ndise Inventory.

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Cost of Merchandise P urchased

Invoice cost of merch a ndise purch a ses 692,500$Less:

Purch a se discounts (10,388) Purch a se returns a nd a llow a nces (4,275)

Add:Cost of tr a nsport a tion-in 4,895 Tot a l cost of merch a ndise purch a ses 682,732$

Ma trix, Inc.Tot a l Cost of M erch a ndise Purch a ses

For Ye a r Ended Ma y 31, 2011

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Accounting for Merchandise Sales

Ma trix, Inc.Comput a tion of Gross Profit

For Ye a r Ended Ma y 31, 2011

S a les 2,451,000$Less:

S a les discounts 29,412$S a les returns a nd a llow a nces 18,500 47,912

Net s a les 2,403,088$Cost of goods sold (1,928,600) Gross profit 474,488$

S a les discounts a nd returns a nd a llow a nces a re Contr a Revenue a ccounts.

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Sales of Merchandise

On March 18, Diamond Store sold $2 5 ,000 of merchandise on account. T he merchandise was carriedin inventory at a cost of $18,000.

Dr. Cr.Ma r. 18 Accounts Receiv a ble 25,000

S a les 25,000 Sales of merchandi se on credi t

Cost of Goods Sold 18,000 M erch a ndise Inventory 18,000

To record cost of sales

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Sales Discounts

On June 8, Barton Co. sold merchandise costing $3, 5 00On June 8, Barton Co. sold merchandise costing $3, 5 00for $6,000 on account. Credit terms were 2/10, n/30. Letsfor $6,000 on account. Credit terms were 2/10, n/30. Letsprepare the journal entries.prepare the journal entries.

Dr. Cr.Jun. 8 Accounts Receiv a ble 6,000

S a les 6,000 Sales of mercha ndi se on credit

Cost of Goods Sold 3,500 M erch a ndise Inventory 3,500

To r ecord cost of sa les

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Sales Discounts

On June 17, Barton Co. received a check for $ 5 ,880in full payment of the June 8 sale.

Ca sh 5,880 Sa les Discount 120

Accounts Receiv a ble 6,000

Received payment less discount

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Sales Returns and Allowances

On June 12, Barton Co. sold merchandisecosting $4,000 for $7, 5 00 on account. T hecredit terms were 2/10, n/30.

Dr. Cr.Jun. 12 Accounts Receiv a ble 7,500

S a les 7,500 Sales of merchandise on credit

Cost of Goods Sold 4,000 M erch a ndise Inventory 4,000

To record cost of sal es

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Sales Returns and Allowances On June 14, merchandise with a sales price of $800 and

a cost of $470 was returned to Barton. T he return isrelated to the June 12 sale.

Dr. Cr.Jun. 14 S a les Returns a nd Allow a nces 800

Accounts Receiv a ble 800 Customer returned merchandise

M erch a ndise Inventory 470 Cost of Goods Sold 470

Returned goods placed in inventory

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Sales Returns and Allowances

On June 20, Barton received the amount owed to it fromthe sale of June 12.

S a le 7,500$Return (800) Amount due 6,700$Discount (134) Ca sh received 6,566$

Dr. Cr.

Jun. 20 C a sh 6,566 S a les Discount 134

Accounts Receiv a ble 6,700 Recei ved payment l ess di scount

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L ets complete theaccounting cycleby preparing the

closing entriesclosing entries forBarton.

Ba rton Comp a nyAdjusted Tri a l Ba la nce

December 31, 2011

Ca sh 7,700$Accounts receiv a ble 11,200 M erch a ndise inventory 14,300 Supplies 1,300 Equipment 41,200 Accum. depr.- Equip. 7,000$Accounts p a ya ble 16,400 S a la ries p a ya ble 1,000 Common Stock 42,400 Ret a ined E a rningsDividends 4,000 S a les 323,800 S a les discounts 4,300

Sa

les returns 2,000 Cost of goods sold 233,200 Admin. s a la ries expense 18,200 S a les s a la ries expense 29,600 Insur a nce expense 1,200 Rent expense 8,100 Supplies expense 1,000 Advertising expense 13,300

390,600$ 390,600$

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Step 1:Step 1: Close Credit Balances inT emporary Accounts to Income

Summary.

323,800 Income Summary

Dr. Cr.Dec. 31 S a les 323,800

Income summ a ry 323,800 To close credit balancesin temporary accounts

Ba rton Comp a nyAdjusted Tri a l B a la nce

December 31, 2011

S a la ries p a ya ble 1,000 Owner's C a pit a l 42,400 Withdr a w a ls 4,000 S a les 323,800 S a les discounts 4,300 S a les returns 2,000 Cost of goods sold 233,200 Admin. s a la ries expense 18,200 S a les s a la ries expense 29,600 Insur a nce expense 1,200 Rent expense 8,100

Supplies expense 1,000 Advertising expense 13,300

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Step 2:Step 2: Close Debit Balances inT emporary Accounts to Income

Summary.

310,900 323,800

12,900

Income Summary

Dr. Cr.

De c. 31 Incom e Sum m a ry 310,900

S a les Discounts 4,300

S a les Returns 2,000

Cost of Goods Sold 233,200 Adm. S a l a ries Expense 18,200

S a les S a l a ries Expense 29,600

Insur a nce Expense 1,200

Rent Expense 8,100

Supplies Expense 1,000

Advertis ing Expense 13,300 To close debit balances in temporary accounts

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Step 3:Step 3: Close Income Summary toOwners Capital

310,900 323,800 12,900

-0-

Income S ummary

Dr. Cr.Dec. 31 Income Summ a ry 12,900

Owner's C a pit a l 12,900 To close Income Summary account

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Step 4:Step 4: Close W ithdrawals to OwnersCapital

Dr. Cr.Dec. 31 Owner's C a pit a l 4,000

Withdr a w a ls 4,000 To cl ose the wi thdr a wa l s a ccount

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Income Statement Formats

MultipleMultiple- -StepStep

SingleSingle- -StepStep

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Multiple-Step Income Statement

Ba rton Comp a nyIncome St a tement

For Ye a r Ended December 31, 2011

S a les 323,800$Less: S a les discounts 4,300$

S a les returns 2,000 6,300

Net s a les 317,500$Cost of Goods Sold 233,200 Gross profit from s a les 84,300$Oper a ting expenses:

Selling expenses:S a la ries expense 29,600$Advertising expense 13,300 42,900$

Gener a l a nd a dministr a tive expenses:Adm. s a la ries expense 18,200$Insur a nce expense 1,200 Rent expense 8,100 Supplies expense 1,000 28,500

Tot a l oper a ting expenses 71,400 Net income 12,900$

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Single-Step Income Statement

Ba rton Comp a nyIncome St a tement

For Ye a r Ended December 31, 2011Net s a les 317,500$Cost of goods sold 233,200$Oper a ting expenses 71,400

Tot a l expense 304,600 Net income 12,900$

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Balance Sheet

Ca sh 10,200$ Accounts p a ya ble 1,200$M erchandise Inventory 1,200 Notes p a ya ble 4,000 Equipment 16,000 Tot a l l ia bilities 5,200

EquityOwner's C a pit a l 22,200 Tot a l a ssets 27,400$ Tot a l l ia bilities a nd equity 27,400$

Assets Li a bilities

M erch a ndising Comp a ny

Ba

la

nce SheetDecember 31, 2011

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Acid-T est Ratio

A common rule of thumb is the acid-test ratio should have avalue of at least 1.0 to conclude a company is unlikely toface liquidity problems in the near future.

=Quick AssetsQuick Assets

Current LiabilitiesCurrent LiabilitiesAcidAcid--TestTest

RatioRatio

AcidAcid--TestTestRatioRatio ==

Cash + SCash + S--T Investments + ReceivablesT Investments + ReceivablesCurrent LiabilitiesCurrent Liabilities

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G ross Margin Ratio

Percent a ge of

dolla

r sa

lesa va ila ble to cover expenses a ndprovide a profit.

Ye a r Percent2005 30.2%2004 28.8%2003 27.7%2002 29.8%2001 30.7%

26.0%

27.0%

28.0%

29.0%

30.0%

31.0%

200 5 2004 2003 2002 2001

GrossMarginRatio

Net Sales - Cost of Goods SoldNet Sales

=

A2

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End of Chapter 4