Merchandising Operations

ATG 157 - Chapter ATG 157 - Chapter 55Merchandising OperationsMerchandising Operations

&&

The Multiple-Step Income StatementThe Multiple-Step Income Statement

Study ObjectivesStudy Objectives

Identify the differences between:Identify the differences between: Service CompanyService Company Merchandising CompanyMerchandising Company

Explain recording of purchases and sales Explain recording of purchases and sales revenues under a revenues under a perpetual inventory systemperpetual inventory system

Distinguish between:Distinguish between: Single-Step Income StatementSingle-Step Income Statement Multiple-Step Income StatementMultiple-Step Income Statement

Study Objectives (Cont’d)Study Objectives (Cont’d)

Determine Determine Cost of Goods SoldCost of Goods Sold under a under a periodic inventory systemperiodic inventory system

Explain the factors affecting profitabilityExplain the factors affecting profitability

Service vs. Service vs. MerchandisingMerchandising

Service CompaniesService Companies Revenues earned through performance of Revenues earned through performance of

servicesservices Examples:Examples:

Dentists, Accounting Firms, AttorneysDentists, Accounting Firms, Attorneys

Merchandising CompaniesMerchandising Companies Revenues earned through sales of Revenues earned through sales of

merchandisemerchandise Examples: Restaurants, Dept. StoresExamples: Restaurants, Dept. Stores

Merchandising companies buy and sell merchandise.

Service enterprises Service enterprises perform services as perform services as their primary their primary source of revenue.source of revenue.

Merchandising Merchandising CompaniesCompaniesWholesalers vs. RetailersWholesalers vs. Retailers

Wholesalers Wholesalers Merchandising Companies who sell to Merchandising Companies who sell to

retailersretailers

Retailers Retailers Merchandising Companies who purchase Merchandising Companies who purchase

and sell directly to consumersand sell directly to consumers

TermsTerms

Sales revenue or salesSales revenue or sales = sale of = sale of merchandise merchandise

Cost of goods soldCost of goods sold = total cost of = total cost of merchandise soldmerchandise sold

Merchandising Merchandising OperationsOperations

Primary Revenues:Primary Revenues: Sales Revenue (or Sales)Sales Revenue (or Sales)

Expenses:Expenses: Cost of Goods SoldCost of Goods Sold Operating ExpensesOperating Expenses

Operating ExpensesOperating Expenses

Selling, General and Administrative Selling, General and Administrative expenses relating to the sale of expenses relating to the sale of merchandisemerchandise

in book

SalesRevenue

Cost ofGoods Sold

GrossProfit

OperatingExpenses

Net Income (Loss)

Less

LessEquals

Equals

How Income is Measured in a Merchandising Company

Receive Cash

Receive Cash

Perform Services

Buy Inventory

Sell Inventory

Service Company

Merchandising Company

Cash

Cash

AccountsReceivable

AccountsReceivable

MerchandiseInventory

Inventory SystemsInventory Systems

Two Types:Two Types:

1.1. Perpetual Inventory SystemPerpetual Inventory System

2.2. Periodic Inventory SystemPeriodic Inventory System

Perpetual Inventory Perpetual Inventory SystemSystem

Detailed records maintained continuouslyDetailed records maintained continuously

Inventory on hand known at any timeInventory on hand known at any time

Cost of Goods sold determined at point Cost of Goods sold determined at point of saleof sale

Periodic Inventory Periodic Inventory SystemSystem

Does not involve maintenance of detailed Does not involve maintenance of detailed system pertaining to goods on handsystem pertaining to goods on hand

Does not show inventory on hand at any given Does not show inventory on hand at any given timetime

Involves physical count of inventory at the end Involves physical count of inventory at the end of the accounting periodof the accounting period Cost of Goods sold determined at time of physical Cost of Goods sold determined at time of physical

inventory countinventory count

Record Revenue and compute and record Cost of Goods

Compute and record Cost of

Goods Sold

Perpetual

Periodic

Perpetual

Item Sold

End of Period

Comparing Periodic and Perpetual Inventory Systems

Inventory Purchased

Record Purchase of Inventory

End of Period

No Entry

Record Purchase of Inventory Record Revenue Only

Inventory Purchased Item Sold

Considerations...Considerations...

Perpetual Inventory SystemPerpetual Inventory System Generally used by companies who sell high-Generally used by companies who sell high-

ticket itemsticket items Gives better control over these inventoriesGives better control over these inventories Cost can be minimized through Cost can be minimized through

computerized systemcomputerized system Growing in popularityGrowing in popularity

Recording of PurchasesRecording of Purchases

Perpetual Inventory SystemPerpetual Inventory System

Purchases made:Purchases made: By Cash orBy Cash or On AccountOn Account

When recorded?When recorded? Generally when goods are receivedGenerally when goods are received

What Is Charged to Merchandise Inventory?

All costs of getting the inventory to company All costs of getting the inventory to company and ready to selland ready to sell Freight-InFreight-In Special PermitsSpecial Permits

Only costs associated with merchandise Only costs associated with merchandise purchased for resale - purchased for resale - notnot assets acquired for assets acquired for use, such as suppliesuse, such as supplies

Recording PurchasesRecording Purchases

Purchases supported by:Purchases supported by: Purchase InvoicePurchase Invoice

Indicates total purchase price, quantity, etc.Indicates total purchase price, quantity, etc.

Recording of purchases of merchandise Recording of purchases of merchandise for sale (in a perpetual inventory system):for sale (in a perpetual inventory system): Debit to Merchandise InventoryDebit to Merchandise Inventory Credit to Cash or Accounts PayableCredit to Cash or Accounts Payable

•1. Seller•2.Invoice Date•3.Purchaser•4.Salesperson•5.Credit terms•6.Freight terms•7.Goods sold: catalog no.,description,quantity, price per unit•8.Total invoice price

Invoice No. 731

Address 125 Main StreetAttention o f James Hoover, Purchasing Agent

Firm Name: Sauk Stero

City Chelsea State Illinois Zip 60915

Date5/4/04 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer

Catalog No. Description QTY Price Amount

IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800

1,5003008Production ModelCircuits

A2547Z48

Merchandise PurchasesOn May 4 the company bought $ 3,800 worth of merchandise from PW Audio

Supply, Inc.

GENERAL JOURNAL Debit Credit

May 4 Merchandise Inventory 3,800 Accounts Payable 3,800

To record goods purchased on account.

Accounts Payable

Merchandise Inventory

May 4 3,800

Freight-out May 4 3,800

Purchase Returns & Purchase Returns & AllowancesAllowances

Purchase ReturnsPurchase Returns Purchaser returns goods to seller for credit Purchaser returns goods to seller for credit

or cash refundor cash refund

Purchase AllowancesPurchase Allowances Purchaser dissatisfied with goods keeps Purchaser dissatisfied with goods keeps

those goods as long as the seller grants a those goods as long as the seller grants a discount for the purchase of those goodsdiscount for the purchase of those goods

Purchases Returns and AllowancesOn May 8 the company returned $300 worth

of merchandise to PW Audio Supply, Inc.


May 8 Accounts Payable 300 Merchandise Inventory 300

To record goods returned that were purchased on account.

Accounts Payable


May 4 3,800

Freight-out May 4 3,800May 8 300 May 8 300

Freight CostsFreight Costs

Whether these costs are included in Whether these costs are included in inventory is determined on whether:inventory is determined on whether: Buyer incurs costsBuyer incurs costs

Merchandise inventory increasedMerchandise inventory increased

Seller incurs costsSeller incurs costs Merchandise inventory is Merchandise inventory is notnot increased (is an increased (is an

expense to the seller)expense to the seller)

Freight Costs - On Incoming InventoryOn May 6 the company paid $ 150 to have the merchandise inventory delivered to

them.


May 6 Merchandise Inventory 150

Cash 150

To record payment of freight.

Freight-Out


May 4 3,800

Cash May 6 150May 8 300

May 6 150

Freight Costs-on outgoing inventoryOn May 6 the seller company paid $ 150 to have merchandise inventory delivered to

the buyer.


May 6 Freight-Out (or Delivery Expense) 150

Cash 150

To record payment of freight on goods sold.

Freight-OutMerchandise

Inventory Cash May 6 150May 6 150

Purchase DiscountsPurchase Discounts

Purchases on AccountPurchases on Account

Terms may allow for discount if company Terms may allow for discount if company pays for goods quicklypays for goods quickly

Terms of CreditTerms of Credit

Example, Illus. 5-4:Example, Illus. 5-4: Terms 2/10, n/30Terms 2/10, n/30 Read: “two-ten, net-thirty”Read: “two-ten, net-thirty” Explanation:Explanation:

2% discount if paid within 10 days2% discount if paid within 10 days 2% is less any returns and/or allowances2% is less any returns and/or allowances

If not paid within 10 days, the full invoice is due If not paid within 10 days, the full invoice is due within 30 dayswithin 30 days

The 10 days is called the The 10 days is called the discount perioddiscount period

Purchase Discounts

Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period

Original Invoice $3,800

-Returns 300

Amount due before discount $3,500

2% discount 70

Net due $3,430

Purchase DiscountsReview - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period.


May 14 Accounts Payable 3,500

Cash 3,430 Merchandise Inventory 70

To record payment within discount period.

Accounts Payable


May 4 3,800

Cash May 4 3,800May 8 300 May 8 300

May 14 70 May 14 3,500

May 14 3430May 6 150

May 6 150

Payment of InvoiceReview - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was NOT paid within the discount period.


June 3 Accounts Payable 3,500

Cash 3,500

To record payment NOT within discount period.

Accounts Payable


May 4 3,800

Cash May 4 3,800May 8 300 May 8 300

Jun 3 3,500 Jun 3 3,500

Sales Invoice ...Sales Invoice ...

a business document that provides a business document that provides written evidence of a credit sale.written evidence of a credit sale.

Sales Revenues -Under a Perpetual System

are recorded when earned-revenue are recorded when earned-revenue recognition principlerecognition principle

must be supported by a business document-must be supported by a business document-written evidencewritten evidence

2 entries are made for each sale2 entries are made for each sale one to record saleone to record sale one to record cost of merchandise soldone to record cost of merchandise sold

Sales EntriesSales Entries

1.1. Record Sale:Record Sale: Debit to Debit to CashCash or or Accounts ReceivableAccounts Receivable Credit to Credit to Sales RevenueSales Revenue

2.2. Record Cost of Sale:Record Cost of Sale: Debit to Debit to Cost of Goods SoldCost of Goods Sold Credit to Credit to Merchandise InventoryMerchandise Inventory

Sales - under a perpetual systemAssume a sale of $ 3,800 ON ACCOUNT

CashAccounts

ReceivableMerchandise

Inventory

Cost of Goods Sold

Sales Returns & AllowancesSales

May 4 3,800

May 4 2,400

May 4 2,400

For merchandise having a cost of $2,400

May 4 3,800

Sales Returns and Sales Returns and AllowancesAllowances

Flip side of purchase returns and allowanceFlip side of purchase returns and allowance

On buyer’s books


May 8 Accounts Payable 300 Merchandise Inventory 300

To record goods returned that were purchased on account.

On seller’s books


May 8 Sales Returns and Allowance 300 Accounts Receivable 300

To record return of goods delivered to Sauk Stero.

What Is the Sales Returns What Is the Sales Returns and Allowances Account?and Allowances Account? Contra Revenue AccountContra Revenue Account to salesto sales

Normal Balance = Normal Balance = DebitDebit

Used to show how much came in on returns and allowancesUsed to show how much came in on returns and allowances

Excessive returns and allowances suggest: inferior merchandise inefficiencies in filing orderserrors in billing customersmistakes in delivery or shipment of goods

What Is the Sales What Is the Sales Discount Account?Discount Account? Contra Revenue AccountContra Revenue Account to sales revenueto sales revenue

Normal balance = Normal balance = debitdebit

Used to disclose amount of cash discounts taken by customersUsed to disclose amount of cash discounts taken by customers

Sales DiscountsSales Discounts

Flip side of purchase discountsFlip side of purchase discounts

On seller’s books


May 14 Cash 3,430 Sales Discounts 70

Accounts Receivable 3500

To record collection within discount period.

On buyer’s books


May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70

To record payment within discount period

Two Forms OfTwo Forms OfIncome StatementsIncome Statements

Single-step income statementSingle-step income statement Multiple-step income statementMultiple-step income statement

Single-Step Income Single-Step Income StatementStatement

One step… subtract total One step… subtract total

expenses from total revenuesexpenses from total revenues

Revenues $10,000Expenses 3,000Net income $ 7,000

PW AUDIO, Inc.PW AUDIO, Inc.Single-step Income StatementSingle-step Income Statement

For the Year Ended December 31, 2004For the Year Ended December 31, 2004

Sales Sales $460,000$460,000

Interest RevenueInterest Revenue 3,000 3,000

Gain on Sale of equipmentGain on Sale of equipment 600 600

Total RevenuesTotal Revenues $463,600$463,600

ExpensesExpenses

Cost of goods soldCost of goods sold $316,000$316,000

Selling expensesSelling expenses 76,000 76,000

Administrative expensesAdministrative expenses 38,000 38,000

Interest expenseInterest expense 1,800 1,800

Casualty Loss from vandalismCasualty Loss from vandalism 200 200

Income tax expenseIncome tax expense 10,100 10,100

Total expensesTotal expenses 442,100442,100

Net incomeNet income $ 21,500 $ 21,500

Multiple-Step Income StatementMultiple-Step Income Statement

More useful than single-step income More useful than single-step income statementstatement

Gives 3 useful line items:Gives 3 useful line items: Gross ProfitGross Profit Operating ExpensesOperating Expenses Total from Non-Operating ActivitiesTotal from Non-Operating Activities

Gross ProfitGross Profit

Is the Is the Merchandising ProfitMerchandising Profit of a company of a company

Calculation:Calculation: Net SalesNet Sales Less: Cost of Goods SoldLess: Cost of Goods Sold = Gross Profit= Gross Profit

Non-Operating ActivitiesNon-Operating Activities

Include:Include: Gains/Losses from Sale of Investments, Gains/Losses from Sale of Investments,

Sale of Equipment, etc.Sale of Equipment, etc. Interest IncomeInterest Income Interest ExpenseInterest Expense

Any revenue &/or expense not relating to Any revenue &/or expense not relating to the company’s main business operationsthe company’s main business operations

Net SalesNet Sales

Total SalesTotal Sales Less: Sales Returns & AllowancesLess: Sales Returns & Allowances Less: Sales DiscountsLess: Sales Discounts = Net Sales= Net Sales

Sales revenuesSales $ 480,000Less: Sales returns and allowance $12,000

Sales discounts 8,000 20,000Net sales 460,000Cost of goods sold 316,000Gross profit $ 144,000Operating expenses Selling expenses:

Store salaries expense $45,000 Advertising expense 16,000 Depreciation expense 8,000 Freight-out 7,000

Total selling expenses $76,000 Administrative expenses Salaries expense $19,000

Utilities expense 17,000 Insurance Expense 2,000

Total administrative expenses 38,000 Total operating expenses 114,000 Income from operations $ 30,000

PW AUDIO SUPPLY, INC.Multi-step Income Statement

For the Year Ended December 31, 2004

Income from operations (continued) $ 30,000 Other revenues and gains Interest revenue $ 3,000 Gain on sale of equipment 600

$ 3,600Other expenses and losses Interest expense $ 1,800 Casualty loss from vandalism 200 2,000 1,600

31,600Income before income income taxes Income tax expense 10,100Net income $21,500

PW AUDIO SUPPLY, INC.Multi-step Income Statement


Cost of Goods Sold -Cost of Goods Sold -Periodic MethodPeriodic MethodA running account of changes in inventory is A running account of changes in inventory is

not maintained.not maintained.

Separate accounts use to record freight Separate accounts use to record freight costs, returns and discountscosts, returns and discounts

Cost of goods sold and ending inventory are Cost of goods sold and ending inventory are calculated at end of period. calculated at end of period.

Cost of goods sold Inventory, January 1 $ 36,000

Purchases $325,000Less Purchase returns and allowances $10,400Purchase discounts 6,800 17,200

Net purchases 307,800Add: Freight-in 12,200

Cost of goods purchased 320,000 Cost of goods available for sale 356,000 Inventory, December 31 40,000

Cost of goods sold 316,000

PW AUDIO SUPPLY, INC.Cost of Goods Sold


Gross Profit Rate=Gross Profit Rate=

Gross ProfitGross Profit

Net SalesNet Sales

Company’s gross profit expressed as a percentage

Profit Margin Ratio Profit Margin Ratio

Measures the percentage of each dollar of Measures the percentage of each dollar of

sales that results in net incomesales that results in net income

Profit Margin Ratio = Net IncomeNet Sales

Higher value suggests favorable return on each dollar of sales.

Chapter 5 AppendixChapter 5 AppendixPeriodic Inventory System Periodic Inventory System

Main difference from Perpetual Inventory Main difference from Perpetual Inventory System:System:

When Cost of Goods Sold is RecordedWhen Cost of Goods Sold is Recorded Perpetual – at time of salePerpetual – at time of sale Periodic – at end of accounting periodPeriodic – at end of accounting period

Recording Merchandise Recording Merchandise Purchases (Periodic System)Purchases (Periodic System)

Purchases recorded in:Purchases recorded in: Purchase accountPurchase account

Is a temporary accountIs a temporary account Normal balance – DebitNormal balance – Debit

Illustration: Merchandise Illustration: Merchandise Purchase (Periodic System)Purchase (Periodic System)

Record purchase of $3,800 goods on Record purchase of $3,800 goods on account in a periodic system:account in a periodic system:

DebitDebit CreditCredit

Purchases 3,800Purchases 3,800

Accounts Payable 3,800Accounts Payable 3,800

Recording Purchase Returns Recording Purchase Returns (Periodic System)(Periodic System)

Uses Uses Purchase Returns & AllowancesPurchase Returns & Allowances AccountAccount Is temporary accountIs temporary account Normal Balance: CreditNormal Balance: Credit

Illustration: Purchase Illustration: Purchase Returns (Periodic System)Returns (Periodic System)

Record return of $300 goods purchased on Record return of $300 goods purchased on account in a periodic system:account in a periodic system:


Accounts Payable 300Accounts Payable 300

Purchase ReturnsPurchase Returns

and Allowances 300and Allowances 300

Recording Freight Costs on Recording Freight Costs on Purchases (Periodic System)Purchases (Periodic System)

Account used:Account used: Freight-In (or Transportation-In)Freight-In (or Transportation-In)

Is a temporary accountIs a temporary account Normal Balance = DebitNormal Balance = Debit

Freight-In becomes part of cost of goods Freight-In becomes part of cost of goods purchasedpurchased

Illustration: Freight Paid on Illustration: Freight Paid on Purchase (Periodic System)Purchase (Periodic System)

Paid $150 in freight charges on Paid $150 in freight charges on merchandise purchased:merchandise purchased:


Freight-InFreight-In 150 150

CashCash 150 150

Recording Discounts on Recording Discounts on Purchases (Periodic System)Purchases (Periodic System)

Account used:Account used: Purchase DiscountsPurchase Discounts

Is a temporary accountIs a temporary account Normal Balance = CreditNormal Balance = Credit

Illustration: Discount on Illustration: Discount on Purchase (Periodic System)Purchase (Periodic System)

Received $70 Discount on goods Received $70 Discount on goods purchased (total of purchase = $3,500)purchased (total of purchase = $3,500)


Accounts Payable 3,500Accounts Payable 3,500

Purchase Discounts 70Purchase Discounts 70

Cash 3,430Cash 3,430

Recording Sales of Merchandise Recording Sales of Merchandise (Periodic System)(Periodic System)

Single Entry only:Single Entry only: Debit Accounts Receivable (or Cash)Debit Accounts Receivable (or Cash) Credit to Sales RevenueCredit to Sales Revenue

Entry to record Cost of Goods Sold done Entry to record Cost of Goods Sold done at end of periodat end of period

Recording Sales Returns & Recording Sales Returns & Allowances (Periodic System)Allowances (Periodic System)

Same Entry as perpetual system:Same Entry as perpetual system:

Debit to Sales Returns & AllowancesDebit to Sales Returns & Allowances Credit to Accounts ReceivableCredit to Accounts Receivable

Recording Sales Discounts Recording Sales Discounts (Periodic System)(Periodic System)

Same Entry as perpetual system:Same Entry as perpetual system:

Debits:Debits: CashCash Sales DiscountsSales Discounts

Credit to Accounts ReceivableCredit to Accounts Receivable

Chapter 5 HomeworkChapter 5 Homework

Brief Exercises: BE 5-1, 5-2, 5-3, 5-4, Brief Exercises: BE 5-1, 5-2, 5-3, 5-4, 5-5, 5-95-5, 5-9

Exercises: E5-1, 5-2, 5-3, 5-5, 5-11Exercises: E5-1, 5-2, 5-3, 5-5, 5-11

Problems: P5-1A, 5-4A, 5-7A, 5-7B Problems: P5-1A, 5-4A, 5-7A, 5-7B

Due Date: Wednesday, 10/6/04Due Date: Wednesday, 10/6/04

Merchandising Operations

Business

Transcript of Merchandising Operations