Easy Print Merchandising

7/28/2019 Easy Print Merchandising

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Introduction to Accountingfor Merchandising

Operations

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Objectives

Review accrualaccounting basics

Introduceterminology formerchandisingoperations

Accrual basics

revenue recognition income determination matching


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Revenue Recognition

Revenue is recognizedwhen the earningprocess is substantiallycomplete and themeasurability and thecollectibility of the dollaramount is reasonablyassured.

Revenue Recognition

Revenue is recognizedwhen the earningprocess is substantiallycomplete and themeasurability and thecollectibility of the dollaramount is reasonablyassured.

For most businessesrevenue is recognizedwhen goods are shippedto customers or servicesare provided.

Question:

If in January:A photographer starts a new business on January

1st The photographer takes, develops and delivers

pictures worth $7,500 to customers The photographer invoices $6,000 of these services

in January but does not get around to invoicing alarge corporate customer in February for the $1,500owed for photos finished and delivered in January

Customers paid $5,000 for photos The photographer expects all amounts owed will be

collected eventually What was the Revenue for January?

Question:

If in January:A photographer starts a new business on January

1st The photographer takes, develops and delivers

pictures worth $7,500 to customers The photographer invoices $6,000 of these services

in January but does not get around to invoicing alarge corporate customer in February for the $1,500owed for photos finished and delivered in January

Customers paid $5,000 for photos The photographer expects all amounts owed will be

collected eventually What was the Revenue for January?Answer: $7,500


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The earning process

The earning process canstretch over aconsiderable period oftime and is fraught withuncertainties

Accountants recognizerevenue at the earliestpoint when the workdone to earn it issubstantially complete

Revenue: an increase in net

assets from operations

Income Determination

Under accrualaccountingexpenses incurred

are matched withrelated revenue todetermine netincome for aparticular time

period

Income Determination

Revenue $xxx

Less: Expenses ($xx)

Net Income $ xx

Under accrualaccountingexpenses incurredare matched withrelated revenue todetermine netincome for aparticular timeperiod


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Question:

If in January:A photographer has Sales of $7,500 Photographic Supplies worth $700 are

purchased on account

$500 is paid for the Photographic Suppliespurchased

$400 of Photographic Supplies are used up What was the Net Income for January if

there were no other expenses?

Question:

If in January:A photographer has Sales of $7,500 Photographic Supplies worth $700 are

purchased on account $500 is paid for the Photographic Supplies

purchased $400 of Photographic Supplies are used up

What was the Net Income for January ifthere were no other expenses?

Answer: $7,100

Net Income =

Revenue - Expenses

Net Income = Revenue Expenses

= $7,500 Supply Expense

Recognize expense:

Dr Supplies (balance sheet account)

Cr Cash or Accounts Payable

not at time of purchase

Dr Supplies Expense (income statement)

Cr Supplies (balance sheet account)

recognize expense at time assets expire/are used up

Expenses: a decrease in net

assets (used up assets)


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Matching

Mismatched shoesare silly .. Unmatchedrevenues and

expenses aremisleading

Matching

Revenue $xxx

Less: Expenses ($xx)

Net Income $ xx

Mismatched shoesare silly .. Unmatchedrevenues and

expenses aremisleading

Cash vs Accrual Basis

In contrast to the accrualbasis, cash basisaccounting recognizesrevenue when money isreceived and recognizesmoney when paid

Cash vs Accrual Basis

In contrast to the accrualbasis, cash basisaccounting recognizesrevenue when money isreceived and recognizesmoney when paid

Cash basis may distortthe portrayal of financialposition and over or

understate performancemeasurement


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service operations

Provide services ratherthan selling products

Have relatively smallsupply costs

Match expenses torevenue at end of period

Merchandising Operations

Buy and sell finished goods Cost of Goods Sold the

cost of items shipped tocustomers - is usually alarge expense

Inventory is reported onthe Balance Sheet: it isgoods held for sale


Cost of Goods Sold (COGS) is a significant expense fora merchandising operations

COGS is often reported as a separate line item on theIncome Statement




Often the change in inventory is computed at the timeof each sale (the perpetual method)


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income statement

Revenue $xxx

Cost of Goods Sold xxx

Gross Profit xxx

Operating Expenses

Selling Expenses xxx

Administrative Expenses xxx xxx

Net Income $xxx

Balance Sheet

ASSETSCurrent AssetsCash $xxxAccounts receivable xxxInventory, at cost xxxPrepaid expenses xxx

Total Current Assets xxxxCapital AssetsLand $ xxxBuildings and Equipment xxxless: Accumulated depreciation xxx xxxxTotal Assets $xxxx

Recognizing Cost of Goods

Sold

not expensed when goods are purchased

Dr Inventory (balance sheet account)


COGS is recognized when goods are sold

Dr Cost of Goods Sold (income statement)

Cr Inventory (balance sheet account)

Recognizing Cost of Goods

Sold

not expensed when goods are purchased

Dr Inventory (balance sheet account)


COGS is recognized when goods are sold

Dr Cost of Goods Sold (income statement)

Cr Inventory (balance sheet account)

Well controlled

merchandiseoperations use aseparate inventoryaccount for each item


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Perpetual inventory system

separate account for each inventory item accounting entry for every inventory receipt and shipment

Dr InventoryCr Accounts Payable or Cash

When

received

Perpetual inventory system

separate account for each inventory item accounting entry for every inventory receipt and shipment

Dr InventoryCr Accounts Payable or Cash

Dr Cost of Goods SoldCr Inventory

When

received

When sold

and shipped





Sometimes the change in inventory is computed at theend of the accounting period (the periodic method)

Periodic inventory system


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Sometimes the change in inventory is computed at theend of the accounting period (the periodic method)

Even if the perpetual method is used, inventory must becounted and valued and the accounting recordsadjusted to the computed value

Mug promotions

Prepare financialstatements for theworlds simplestmerchandising business

Mug promotions

Buys ceramic mugs for$2 each

Customizes the mugswith a logo (in thisexample magically at nolabour cost to focusattention on theinventory transactions)

Sells the customizedmugs on account for $3each

Mug Promotions

Begins June:

Cash $ 5,000Accounts Receivable $ 2,000Inventory $ 4,000

Accounts Payable $ 1,000

During June:

receives 1,000 mugs and ships 2,500 mugs invoices customers for 2,000 mugs collects $5,000 from customers Pays suppliers $2,000


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Question:

What was revenue in June?

Begins June:



During June:

receives 1,000 mugs and ships 2,500 mugs invoices customers for 2,000 mugs collects $5,000 from customers Pays suppliers $2,000 Mugs sell for $3 each on account; mugs cost $2 each

Answer:

Mug Promotions

Income Statement for June

Revenue $7,500

Mugs sell for $3 each and 2,500 wereshipped in June.

Revenue is recognized when goods aredelivered.

Question:

What was COGS in June?

Begins June:



During June:


Answer:

Mug PromotionsIncome Statement for June

Revenue $7,500Cost of goods sold 5,000Gross Profit $2,500

Mugs cost $2 each. Cost of goods sold is matchedtorevenue - - 2,500 mugs were sold in June so the cost

of 2,500 mugs, 2,500 x $2, is recognized as Cost ofGoods Sold

There are no other expenses Net Income is also$2,500


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Question:

What was Cash Balance at

June 30th?Begins June:



During June:


Answer:

ASSETS June 30 June 1

Cash $8,000 $ 5,000

Accounts Receivable ?? $ 2,000

Inventory ?? $ 4,000

?? $11,000

LIABILITIES and OWNERs EQUITY

Accounts Payable ?? $ 1,000

Owners Equity ?? ??

Cash Balance June 1 ($5,000) + Customer

Receipts ($5,000) payments to suppliers ($2,000)

Question:

What was Accounts Receivable

Balance at June 30th?Begins June:



During June:


Answer


Cash $8,000 $ 5,000

Accounts Receivable 4,500 $ 2,000

Inventory ?? $ 4,000

?? $11,000



Owners Equity ?? ??A/R Balance June 1 ($2,000) + Credit Sales

($7,500) - Customer Receipts ($5,000)


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Question:

What was Inventory




During June:


Answer


Cash $8,000 $ 5,000


Inventory 1,000 $ 4,000

$13,500 $11,000



Owners Equity ?? ??

Inventory Balance June 1 ($4,000) + mugspurchased (1,000 x $2 = $2,000) cost of mugs

shipped ($5,000)

Question:

What was Accounts Payable




During June:


Answer


Cash $8,000 $ 5,000


Inventory 1,000 $ 4,000

$13,500 $11,000


Accounts Payable $1,000 $ 1,000

Owners Equity ?? ??

Accounts Payable Balance June 1 ($1,000) + mugspurchased (1,000 x $2 = $2,000) payments($2,000)


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Question:

What was Owners Equity




During June:


Answer


Cash $8,000 $ 5,000


Inventory 1,000 $ 4,000

$13,500 $11,000



Owners Equity ?? $10,000

?? $11,000

Balance Sheet Equation Assets = Liabilities + OE

Question:

Do June 30th Statements

Balance?Begins June:



During June:


Does the computed NetIncome change OwnersEquity to balance theBalance Sheet?

Answer


Cash $8,000 $ 5,000


Inventory 1,000 $ 4,000

$13,500 $11,000



Owners Equity $12,500 $10,000

$13,500 $11,000Yes! Owners Equity at June 1 + Net Income ($2,500) is

$12,500 which balances


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Financial StatementsBalance Sheet

Assets = Liabilities + Shareholders' Equity

Share Capital + Retained Earnings

Cash Flow StatementChanges in cash resultfrom:

investing activitiesfinancing activities

operating activities

Statement ofRetained Earnings (RE)Dividends decrease RENet Income increases RE

Income StatementNet Income = Revenue - Expenses

Computing COGS

Opening Inventory $xxxx

Plus net cost of purchases

Purchases $xxxx

Less: Purchases returns

and allowances (xxx)

Less: Purchase discounts (xx)

Add: Transporation in xx xxx

Cost of Goods Available xxxx

Less ending inventory (xxx)

COGS $xxxx

manufacturing operations

also use Inventory andCost of Goods Soldaccounts

costs included in inventorynot only product costs, butalso certain manufacturingcosts and period costs(e.g., rent and utilities)

Separate inventoriesamounts are reported: raw

materials inventories, work-in-process inventories andfinished goods inventories.

inventory errors

Errors which incorrectly includes orexcludes items from ending inventory willresult in both income statement andbalance sheet errors

Errors in inventory valuation will result inboth income statement and balance sheeterrors.

Inventory errors can be HUGE


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merchandising example

www.homedepot.com

world's largest home improvementretailer

For year ended February 3, 2002:over 1,500 stores and 280,000

employees

merchandising example

www.homedepot.com

world's largest home improvement retailer over 1,500 stores and over 250,000 employees Net Sales over $50 billion US Cost of Goods Sold over $30 billion US

Accountings contribution

Home Depot:

has over 40,000 different inventory items has over 6 Billion US$ in inventory

Good inventory accounting is apart of its success story

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