Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5.
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Transcript of Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5.
Slide 5-1
Accounting for Accounting for Merchandising Merchandising
OperationsOperations
Financial Accounting,
Seventh Edition
Chapter 5
Slide 5-2
Service organizations provide a service to earn Service organizations provide a service to earn revenue.revenue.
Examples: Google, Verizon, Fox, Marriott, ESPN.Examples: Google, Verizon, Fox, Marriott, ESPN.
Service organizations provide a service to earn Service organizations provide a service to earn revenue.revenue.
Examples: Google, Verizon, Fox, Marriott, ESPN.Examples: Google, Verizon, Fox, Marriott, ESPN.
RevenuesRevenues ExpensesExpensesMinus Net
incomeNet
incomeEquals
Service ActivitiesService ActivitiesService ActivitiesService Activities
How has the NETFLIX business model changed over time?
Slide 5-3
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Merchandising Merchandising CompaniesCompanies
Buy and Sell Goods
Wholesaler Retailer Consumer
The primary source of revenues is referred to as sales revenue or sales.
Slide 5-4
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Income MeasurementIncome Measurement
Cost of goods sold (an Expense) is the total cost of merchandise sold during the
period.
Not used in a Service business.
Operating Income (Loss)
Less
LessEquals
Equals
SalesRevenue
Cost of Goods Sold
Gross Profit
Operating Expenses
Slide 5-5
Reporting Income of Merchandising Reporting Income of Merchandising CompanyCompanyReporting Income of Merchandising Reporting Income of Merchandising CompanyCompany
WAL-MART STORES, Inc.Consolidated Statement of Income
For the year ended January 31, 2012(all amounts in millions)
Slide 5-6
Reporting Income of Merchandising Reporting Income of Merchandising CompanyCompanyReporting Income of Merchandising Reporting Income of Merchandising CompanyCompany
BEST BUY COMPANY, Inc.Consolidated Statement of IncomeFor the year ended March 3, 2012(all amounts in millions of dollars)
Slide 5-7
How Big is WAL-MART?How Big is WAL-MART?How Big is WAL-MART?How Big is WAL-MART?
Slide 5-8
Knowledge Check Question:Knowledge Check Question:In its income statement, a company reported In its income statement, a company reported operating expenses of $157,000. Determine operating expenses of $157,000. Determine sales and gross profit given cost of goods sold sales and gross profit given cost of goods sold was $544,000 and operating loss was $41,000.was $544,000 and operating loss was $41,000.
1.1. Sales: $660,000; Gross Profit: $503,000.Sales: $660,000; Gross Profit: $503,000.
2.2. Sales: $742,000; Gross Profit: $198,000.Sales: $742,000; Gross Profit: $198,000.
3.3. Sales: $742,000; Gross Profit: $585,000.Sales: $742,000; Gross Profit: $585,000.
4.4. Sales: $660,000; Gross Profit: $116,000.Sales: $660,000; Gross Profit: $116,000.
Slide 5-9
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 Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.The perpetual inventory system provides a continuous
record of Merchandise Inventory and Cost of Goods Sold.
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Flow of Costs
Slide 5-10
+
+
Cost of Beginninginventory
Cost of Beginninginventory
Net cost ofpurchasesNet cost ofpurchases
Cost of goodsavailable for sale Cost of goodsavailable for sale
Cost of Ending inventory
Cost of Ending inventory
Cost of goodssold
Cost of goodssold
==
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Slide 5-11
Knowledge CheckKnowledge Check::A company’s cost of goods sold was $345,000. A company’s cost of goods sold was $345,000. Determine net cost of purchases and cost of ending Determine net cost of purchases and cost of ending inventory, given cost of goods available for sale were inventory, given cost of goods available for sale were $595,000 and cost of beginning inventory was $120,000.$595,000 and cost of beginning inventory was $120,000.
Net Cost of PurchasesNet Cost of Purchases CCost of Ending Inventoryost of Ending Inventory1.1. $475,000$475,000 $250,000$250,000
2.2. $250,000$250,000 $475,000$475,000
3.3. $475,000$475,000 $225,000$225,000
4.4. $250,000$250,000 $225,000$225,000
Slide 5-12
1. Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory
$ 100,000
Add: Purchases, net
800,000
Goods available for sale
900,000
Less: Ending inventory
125,000
Cost of goods sold
$ 775,000
Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations
Flow of CostsPeriodic System
Slide 5-13
Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/09 358-BI
Sold To
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000 We appreciate your business! Ship Chg. -
Tax - Total 27,000$
Sample Invoice
Seller Invoice date
PurchaserOrder numberCredit terms Freight terms
GoodsInvoice amount
Seller Invoice date
PurchaserOrder numberCredit terms Freight terms
GoodsInvoice amount
4-13
Slide 5-14
On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on
account (terms: 2/10, n 30).
On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on
account (terms: 2/10, n 30).
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
Slide 5-15
FOB shipping point(buyer pays freight
costs)
FOB destination(seller pays
freight costs)
Merchandise
Seller Buyer
Recording Transportation CostsRecording Transportation CostsRecording Transportation CostsRecording Transportation Costs
Slide 5-16
On February 1, Wally Mart purchased merchandise On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 inventory (fob shipping point), and paid $600
transportation costs in cash.transportation costs in cash.
On February 1, Wally Mart purchased merchandise On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 inventory (fob shipping point), and paid $600
transportation costs in cash.transportation costs in cash.
Recording Purchase of Merchandise Recording Purchase of Merchandise along with Transportation Costsalong with Transportation Costs
Recording Purchase of Merchandise Recording Purchase of Merchandise along with Transportation Costsalong with Transportation Costs
Slide 5-17
Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.
Purchase Returns and Allowances
Recording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandiseRecording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandise
Return goods for credit if the sale was made on
credit, or for a cash refund if the purchase
was for cash.
May choose to keep the merchandise if the seller will grant an
allowance (deduction) from the purchase
price.
Purchase Return Purchase Allowance
Slide 5-18
On February 4, Wally Mart returned $1,000 of On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier.defective merchandise to the supplier.
On February 4, Wally Mart returned $1,000 of On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier.defective merchandise to the supplier.
Recording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandiseRecording Purchase Returns of Recording Purchase Returns of MerchandiseMerchandise
Slide 5-19
2/10,n/302/10,n/30Discount Percent
Discount Percent
Number of Days
Discount Is
Available
Number of Days
Discount Is
Available
Otherwise, Net (or
All) Is Due
Otherwise, Net (or
All) Is Due
CreditPeriodCreditPeriod
Recording Purchase DiscountsRecording Purchase DiscountsRecording Purchase DiscountsRecording Purchase Discounts
A deduction from the invoice price granted to induce A deduction from the invoice price granted to induce early payment of the amount due.early payment of the amount due.
Advantages:Advantages:
Purchaser saves money.Purchaser saves money.
Seller shortens the operating cycle.Seller shortens the operating cycle.
A deduction from the invoice price granted to induce A deduction from the invoice price granted to induce early payment of the amount due.early payment of the amount due.
Advantages:Advantages:
Purchaser saves money.Purchaser saves money.
Seller shortens the operating cycle.Seller shortens the operating cycle.
Slide 5-20
Purchase Discount TermsTerms
Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise
2% discount if paid within 10
days, otherwise net amount due
within 30 days.
1% discount if paid within
first 10 days of next month.
2/10, n/30 1/10 EOM
Net amount due within the first 10 days of the next
month.
n/10 EOM
Slide 5-21
On February 10, the last day of the discount period, On February 10, the last day of the discount period, Wally Mart paid the Wally Mart paid the balance due for the Feb 1 balance due for the Feb 1 purchase. Prepare the journal entry for payment.purchase. Prepare the journal entry for payment.
On February 10, the last day of the discount period, On February 10, the last day of the discount period, Wally Mart paid the Wally Mart paid the balance due for the Feb 1 balance due for the Feb 1 purchase. Prepare the journal entry for payment.purchase. Prepare the journal entry for payment.
Recording Payments, net of Returns and Recording Payments, net of Returns and DiscountsDiscounts
Recording Payments, net of Returns and Recording Payments, net of Returns and DiscountsDiscounts
Slide 5-22
Recording Payments without discountRecording Payments without discountRecording Payments without discountRecording Payments without discount
If Wally Mart failed to take the discount, and If Wally Mart failed to take the discount, and instead made full payment on February 15, the instead made full payment on February 15, the
journal entry would be:journal entry would be:
If Wally Mart failed to take the discount, and If Wally Mart failed to take the discount, and instead made full payment on February 15, the instead made full payment on February 15, the
journal entry would be:journal entry would be:
Slide 5-23
Knowledge Check:Knowledge Check:Tony Company purchased $8,500 of Tony Company purchased $8,500 of merchandise on September 25 on terms of 1/10, merchandise on September 25 on terms of 1/10, n30. On September 27, Tony returned defective n30. On September 27, Tony returned defective merchandise worth $700, and received full merchandise worth $700, and received full credit. The invoice was paid in full on credit. The invoice was paid in full on September 30. Tony’s journal entry on September 30. Tony’s journal entry on September 30 will include:September 30 will include:
1.1. A credit to merchandise inventory for $700.A credit to merchandise inventory for $700.
2.2. A debit to accounts payable for $7,800.A debit to accounts payable for $7,800.
3.3. A credit to cash for $8,415A credit to cash for $8,415
4.4. A credit to Merchandise Inventory for $85.A credit to Merchandise Inventory for $85.
Slide 5-24
Two Journal Entries to Record a Sale:
Cash or Accounts receivable XXX
Sales XXX
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
#1
Cost of goods sold XXX
Merchandise inventory XXX#2
Selling
Price
Cost
Made for cash or credit (on account).
Normally recorded when earned, usually when goods transfer from seller to buyer.
Sales invoice should support each credit sale.
Slide 5-25
On February 11, Wally Mart sold $1,000 of On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise merchandise on account. The merchandise was carried in inventory at a cost of $700. was carried in inventory at a cost of $700.
Credit Terms were 3/10, n 30. Credit Terms were 3/10, n 30.
On February 11, Wally Mart sold $1,000 of On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise merchandise on account. The merchandise was carried in inventory at a cost of $700. was carried in inventory at a cost of $700.
Credit Terms were 3/10, n 30. Credit Terms were 3/10, n 30.
Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise
Slide 5-26
On February 13, a customer returned merchandise On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to with a sales price of $300 and a cost of $210 to
Wally Mart . The return is related to the Feb 11 sale. Wally Mart . The return is related to the Feb 11 sale. Assume the goods were NOT defective.Assume the goods were NOT defective.
On February 13, a customer returned merchandise On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to with a sales price of $300 and a cost of $210 to
Wally Mart . The return is related to the Feb 11 sale. Wally Mart . The return is related to the Feb 11 sale. Assume the goods were NOT defective.Assume the goods were NOT defective.
Sales Returns and Allowances is a contra revenue account.Sales Returns and Allowances is a contra revenue account.
Recording Returns of Merchandise Recording Returns of Merchandise SoldSoldRecording Returns of Merchandise Recording Returns of Merchandise SoldSold
Slide 5-27
Contra-revenue account (debit).
Sales not reduced (debited) because:
would obscure importance of sales returns and
allowances as a percentage of sales.
could distort comparisons between total sales
in different accounting periods.
Sales Returns and Allowances
Recording returns of Merchandise Recording returns of Merchandise SoldSoldRecording returns of Merchandise Recording returns of Merchandise SoldSold
Slide 5-28
On February 13, a customer returned merchandise with On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the . The return is related to the Feb 11 sale. Assume the
returned goods were defective, and had a scrap returned goods were defective, and had a scrap value of $50. The journal entry would be:value of $50. The journal entry would be:
On February 13, a customer returned merchandise with On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the . The return is related to the Feb 11 sale. Assume the
returned goods were defective, and had a scrap returned goods were defective, and had a scrap value of $50. The journal entry would be:value of $50. The journal entry would be:
Recording Returns of Merchandise Recording Returns of Merchandise SoldSoldRecording Returns of Merchandise Recording Returns of Merchandise SoldSold
Slide 5-29
On February 17, Wally Mart received the net On February 17, Wally Mart received the net amount owed from the sale of Feb 11.amount owed from the sale of Feb 11.
On February 17, Wally Mart received the net On February 17, Wally Mart received the net amount owed from the sale of Feb 11.amount owed from the sale of Feb 11.
Sales Discounts is a contra revenue account.Sales Discounts is a contra revenue account.
Cash Receipts, net of Returns and Cash Receipts, net of Returns and DiscountsDiscountsCash Receipts, net of Returns and Cash Receipts, net of Returns and DiscountsDiscounts
Slide 5-30
Knowledge Check:Knowledge Check:On July 26, Tyler Company makes a sale for $500 On July 26, Tyler Company makes a sale for $500 to Pauli Company. The cost of the merchandise to Pauli Company. The cost of the merchandise sold was $300. On August 1, Pauli Company sold was $300. On August 1, Pauli Company returned the merchandise, which is not defective, returned the merchandise, which is not defective, and is restored back to the inventory. What is and is restored back to the inventory. What is the effect of the August 1 transaction on Total the effect of the August 1 transaction on Total assets and Equity for Tyler Company?assets and Equity for Tyler Company?
1.1. Total assets increase $300;Equity increases $300.Total assets increase $300;Equity increases $300.
2.2. Total assets decrease $500; Equity decreases $500.Total assets decrease $500; Equity decreases $500.
3.3. Total assets decrease $200; Equity decreases $200.Total assets decrease $200; Equity decreases $200.
4.4. Total assets increase $200; Equity increases $200.Total assets increase $200; Equity increases $200.
Slide 5-31
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 and Cost of Goods Sold.
Adjusting Entries
Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle
Slide 5-32
At the end of accounting period, Wally Mart’s At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted Inventory Account shows an unadjusted
balance of $15,000, but a physical count shows balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. that only $14,300 of inventory on hand.
Determine the adjusting entry for Shrinkage.Determine the adjusting entry for Shrinkage.
At the end of accounting period, Wally Mart’s At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted Inventory Account shows an unadjusted
balance of $15,000, but a physical count shows balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. that only $14,300 of inventory on hand.
Determine the adjusting entry for Shrinkage.Determine the adjusting entry for Shrinkage.
Adjusting Entry for ShrinkageAdjusting Entry for ShrinkageAdjusting Entry for ShrinkageAdjusting Entry for Shrinkage
Slide 5-33
Shows several steps in determining net
income.
Two steps relate to principal operating
activities.
Distinguishes between operating and non-
operating activities.
Multiple-Step Income Statement
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Slide 5-34
Income Statement Presentation of Sales
Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
Slide 5-35
Illustration 5-13
Key Items:Key Items:
Net salesNet sales
Gross profitGross profit
Gross profit Gross profit raterate
Illustration 5-10
Gross Profit
Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement
Slide 5-36
Forms of Forms of Financial Financial StatementStatementss
Forms of Forms of Financial Financial StatementStatementss
Key Items:Key Items:
Net salesNet sales
Gross profitGross profit
Operating Operating expensesexpenses
Illustration 5-13
Multiple-Step
Slide 5-37
Forms of Forms of Financial Financial StatementStatementss
Forms of Forms of Financial Financial StatementStatementss
Key Items:Key Items:
Net salesNet sales
Gross profitGross profit
Operating Operating expensesexpenses
Nonoperating Nonoperating activitiesactivities
Net incomeNet income
Illustration 5-13
Slide 5-38
Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit until total revenues exceed total expenses.
2) Format is simpler and easier to read.
Single-Step Income Statement
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Slide 5-39
Illustration 5-14
Single-Step
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Slide 5-40
Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements
Illustration 5-15Classified Balance Sheet
Slide 5-41
End of Chapter 5