Accounting for Merchandising Operations slides/presentation

8/10/2019 Accounting for Merchandising Operations slides/presentation

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CHAPTER 5

Accounting forMerchandising

OperationsKamrul Huda Talukdar

Lecturer

North South University


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Merchandising Operations

SO 1 Identify the differences between service and merchandising companies.

Merchandising CompaniesBuy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to assales revenueor sales.


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Merchandising Operations

Income Measurement

Illustration 5-1

Cost of goodssold is the totalcost of merchandise sold

during the period.

Not used in aService business.

NetIncome(Loss)

Less

LessEquals

Equals

SalesRevenue

Cost ofGoods Sold

GrossProfit

OperatingExpenses



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The operatingcycle of amerchandising

companyordinarily islonger than thatof a service

company.

Operating Cycles

Illustration 5-2



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Features:

Perpetual System

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and

Purchase Discounts are included in Merchandise Inventory.

3. Cost of Goods Sold is increased and Merchandise Inventoryis decreased for each sale.

4. Physical count done to verify Merchandise Inventory

balance.

The perpetual inventory system provides a continuous recordof Merchandise Inventory and Cost of Goods Sold.

Flow of Costs



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Features:

Periodic System

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.3. Calculation of Cost of Goods Sold:

Flow of Costs

Beginning inventory $ 100,000Add: Purchases, net 800,000

Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000



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Made using cash orcredit (on account).

Normally recorded when

goods are received.Purchase invoiceshouldsupport each creditpurchase.

Recording Purchases of Merchandise

SO 2 Explain the recording of purchases under a perpetual inventory system.

Illustration 5-5


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Under the perpetual inventory system, companies record in theMerchandise Inventory account the purchase of goods theyintend to sell.

Illustration: From INVOICE NO. 731(Illustration 5-5) recordthe journal entry Sauk Stereo would make to record itspurchase from PW Audio Supply.

Merchandise inventory 3,800May 4Accounts payable 3,800




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Illustration 5-6

Seller places goods FreeOn Board the carrier, and

buyer pays freight costs.

Seller places goods Free

On Board to the buyersplace of business, and

seller pays freight costs.


Freight Costs Terms of Sale

Freight costs incurred by the seller are an operating expense.


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Illustration: Assume upon delivery of the goods on May 6,Sauk Stereo pays Acme Freight Company $150 for freightcharges, the entry on Sauk Stereos books is:

Merchandise inventory 150May 6

Cash 150



Assume the freight terms on the invoice in Illustration 5-5had required PW Audio Supply to pay the freight charges, theentry by PW Audio Supply would have been:

Freight-out (or Delivery Expense) 150May 6

Cash 150


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Purchaser may be dissatisfiedbecause goods aredamaged or defective, of inferior quality, or do not

meet specifications.

Purchase Returns and Allowances


Return goods for creditif the sale was made on

credit, or for a cashrefund if the purchase

was for cash.

May choose to keep themerchandise if the seller

will grant an allowance(deduction) from the

purchase price.

Purchase Return Purchase Allowance



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In a perpetual inventory system, a return ofdefective merchandise by a purchaser isrecorded by crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowanced. Merchandise Inventory

Question




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Illustration: Assume that on May 8 Sauk Stereo returned toPW Audio Supply goods costing $300.

Accounts payable 300May 8

Merchandise inventory 300


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Credit terms may permit buyer to claim a cashdiscount for prompt payment.

Advantages:Purchaser saves money.

Seller shortens the operating cycle.

Purchase Discounts


Example: Credit terms of 2/10, n/30, is read two-ten, netthirty. 2% cash discount if payment is made within 10 days.



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Accounts payable 3,500May 14

Cash 3,430


Merchandise Inventory 70

(Discount = $3,500 x 2% = $70)


Illustration: Assume Sauk Stereo pays the balance due of$3,500 (gross invoice price of $3,800 less purchase returnsand allowances of $300) on May 14, the last day of thediscount period. Prepare the journal entry Sauk makes to

record its May 14 payment.


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Accounts payable 3,500June 3


Cash 3,500


Illustration: If Sauk Stereo failed to take the discount, andinstead made full payment of $3,500 on June 3, the journalentry would be:


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Merchandise Inventory

Debit Credit

$3,800 8th- Return$300

Balance

4th- Purchase

$3,580

70 14th- Discount


Summary of Purchasing Transactions

1506thFreight-in

Illustration



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Two Journal Entries to Record a Sale

Cash orAccounts receivable Dr

Sales Cr

Recording Sales of Merchandise

SO 3 Explain the recording of sales revenuesunder a perpetual inventory system.

#1

Cost of goods sold Dr

Merchandise inventory Cr

#2

Selling

Price

Cost


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Accounts receivable 3,800May 4

Sales 3,800

Illustration: Assume PW Audio Supply records its May 4sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows.Assume the merchandise cost PW Audio Supply $2,400.

Cost of goods sold 2,4004

Merchandise inventory 2,400


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Flipside of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns andallowances as a percentage of sales.

could distort comparisons between total salesin different accounting periods.

Sales Returns and Allowances




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Illustration: Prepare the entry PW Audio Supply would maketo record the credit for returned goods that had a $300selling price (assume a $140 cost). Assume the goods werenot defective.



Sales returns and allowances 300May 8

Accounts receivable 300


Cost of goods sold 140


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Illustration: Assume the returned goods were defective andhad a scrap value of $50, PW Audio would make the followingentries:



Sales returns and allowances 300May 8Accounts receivable 300




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Offered to customers to promote prompt payment.

Flipside of purchase discount.

Contra-revenue account (debit).

Sales Discount




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Cash 3,430May 14

Accounts receivable 3,500

Sales discounts 70

* [($3,800 $300) X 2%]

*

Illustration: Assume Sauk Stereo pays the balance due of$3,500 (gross invoice price of $3,800 less purchase returnsand allowances of $300) on May 14, the last day of thediscount period. Prepare the journal entry PW Audio Supply

makes to record the receipt on May 14.


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Generally the same as a service company.

One additional adjustment to make the records

agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory andCost of Goods Sold.

Adjusting Entries

Completing the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising company.


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SO 4 Explain the steps in the accounting cycle for a merchandising company.

Illustration: Suppose that PW Audio Supply has anunadjusted balance of $40,500 in Merchandise Inventory.Through a physical count, PW Audio determines that its actualmerchandise inventory at year-end is $40,000. The company

would make an adjusting entry as follows.




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Closing

Entries


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Shows several steps in determining net income.

Two steps relate to principal operatingactivities.

Distinguishes between operating and non-operating activities.

Multiple-Step Income Statement

Forms of Financial Statements

SO 5 Distinguish between a multiple-step and a single-step income statement.


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SO 6 Explain the computation and importance of gross profit.

Illustration 5-13

Key Items:Net sales

Gross profit

Gross profitrate

Illustration 5-10

Calculation of Gross Profit

Illustration 5-13


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Forms of

Financial

Statemen

ts

Key Items:

Net sales

Gross profit

Operatingexpenses


Illustration 5 13

Multiple-Step


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The multiple-step income statement for amerchandiser shows each of the followingfeatures except:

a. gross profit.

b. cost of goods sold.

c. a sales revenue section.d. investing activities section.

Review Question




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Subtract total expenses from total revenues

Two reasons for using the single-step format:

1) Company does not realize any type of profituntil total revenues exceed total expenses.

2) Format is simpler and easier to read.

Single-Step Income Statement




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Illustration 5-14

Single-Step




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Illustration 5-15Classified Balance Sheet



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Periodic System

Separate accounts used to record purchases,freight costs, returns, and discounts.

Company does not maintain a running accountof changes in inventory.

Ending inventory determined by physical count.

SO 7 Explain the recording of purchases and sales ofinventory under a periodic inventory system.

Periodic Inventory System


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Calculation of Cost of Goods Sold

$316,000

Illustration 5A-1


Periodic Inventory System


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Recording Purchases under Periodic System


Illustration: On the basis of the sales invoice (Illustration 5-5)and receipt of the merchandise ordered from PW AudioSupply, Sauk Stereo records the $3,800 purchase as follows.

Purchases 3,800May 4

Accounts payable 3,800


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Illustration: If Sauk pays Haul-It Freight Company $150for freight charges on its purchase from PW Audio Supply on

May 6, the entry on Sauks books is:

Freight-in (Transportation-in) 150May 6

Cash 150

Freight Costs


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Illustration: Sauk Stereo returns $300 of goods to PW AudioSupply and prepares the following entry to recognize the

return.

Accounts payable 300May 8

Purchase returns and allowances 300

Purchase Returns and Allowances


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Illustration: On May 14 Sauk Stereo pays the balance due onaccount to PW Audio Supply, taking the 2% cash discount

allowed by PW Audio for payment within 10 days. SaukStereo records the payment and discount as follows.

Accounts payable 3,500May 14

Purchase discounts 70

Purchase Discounts

Cash 3,430


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No entry is recorded for cost of goods sold at the time ofthe sale under a periodic system.


Recording Sales under Periodic System

Illustration: PW Audio Supply, records the sale of $3,800 ofmerchandise to Sauk Stereo on May 4 (sales invoice No. 731,Illustration 5-5) as follows.

Accounts receivable 3,800May 4

Sales 3,800


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Illustration: To record the returned goods received fromSauk Stereo on May 8, PW Audio Supply records the $300

sales return as follows.

Sales returns and allowances 300May 4

Accounts receivable 300

Sales Returns and Allowances



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Illustration: On May 14, PW Audio Supply receives payment of$3,430 on account from Sauk Stereo. PW Audio honors the 2%

cash discount and records the payment of Sauks accountreceivable in full as follows.

Sales Discounts


Cash 3,430May 14

Accounts receivable 3,500Sales discounts 70


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Comparison of EntriesPerpetual Vs. Periodic

Illustration 5A-2


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Comparison of EntriesPerpetual Vs. Periodic

Illustration 5A-2

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