Slide 5-1 Replace with Title Page for Weygandt Financial 7e.

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Replace with Title Page for Weygandt Financial 7e

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Chapter 5Accounting for Accounting for Merchandising Merchandising

OperationsOperations

Financial Accounting, Seventh Edition

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1. Identify the differences between service and merchandising companies.

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

3. Explain the recording of sales revenues under a perpetual inventory system.

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

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

6. Explain the computation and importance of gross profit.

Study ObjectivesStudy ObjectivesStudy ObjectivesStudy Objectives

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Forms of Forms of Financial Financial

StatementsStatements

Forms of Forms of Financial Financial

StatementsStatements

Accounting for Merchandising OperationsAccounting for Merchandising OperationsAccounting for Merchandising OperationsAccounting for Merchandising Operations

Freight costsFreight costs

Purchase Purchase returns and returns and allowancesallowances

Purchase Purchase discountsdiscounts

Summary of Summary of purchasing purchasing transactionstransactions

MerchandisingMerchandising


MerchandisingMerchandising


Recording Recording Purchases of Purchases of MerchandiseMerchandise

Recording Recording Purchases of Purchases of MerchandiseMerchandise

Recording Recording Sales of Sales of

MerchandiseMerchandise

Recording Recording Sales of Sales of

MerchandiseMerchandise

Completing Completing the the

Accounting Accounting CycleCycle

Completing Completing the the

Accounting Accounting CycleCycle

Operating Operating cyclescycles

Flow of costsFlow of costs—perpetual —perpetual and periodic and periodic inventory inventory systemssystems

Sales returns Sales returns and and allowancesallowances

Sales Sales discountsdiscounts

Adjusting Adjusting entriesentries

Closing Closing entriesentries

Summary of Summary of merchandising merchandising entriesentries

Multiple-step Multiple-step income income statementstatement

Single-step Single-step income income statementstatement

Classified Classified balance sheetbalance sheet

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Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

SO 1 Identify the differences between service and merchandising SO 1 Identify the differences between service and merchandising companies.companies.

Merchandising Merchandising CompaniesCompanies

Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to as sales revenue or sales.

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Income MeasurementIncome Measurement

Illustration 5-1

Cost of goods sold is the total cost of merchandise

sold during the period.

Not used in a Service business.

Net Income (Loss)

Less

LessEquals

Equals

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses


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The operating cycle of a merchandising company ordinarily is longer than that of a service company.

Illustration 5-2



Operating Cycle

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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.



Flow of Costs

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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



Flow of CostsPeriodic System

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Made using cash or credit (on account).

Normally recorded when goods are received.

Purchase invoice should support each credit purchase.

Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise

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

Illustration 5-5

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Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell.

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

Merchandise inventory 3,800May 4

Accounts payable 3,800



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Illustration 5-6

Seller places goods Free On Board the carrier,

and buyer pays freight costs.

Seller places goods Free On Board to the buyer’s place of business, and

seller pays freight costs.


Freight Costs – Terms of – Terms of SaleSale

Freight costs incurred by the seller are an operating expense.

SO 2SO 2

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

Merchandise inventory 150May 6

Cash 150



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

Freight-out (or Delivery Expense) 150May 6

Cash 150

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Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.

Purchase Returns and Allowances


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


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In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowance

d. Merchandise Inventory

QuestionQuestion



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

Accounts payable 300May 8

Merchandise inventory 300

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Credit terms may permit buyer to claim a cash discount 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, net thirty.” 2% cash discount if payment is made within 10 days.


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Purchase Discount TermsTerms


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


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Merchandise Inventory 70

Accounts payable 3,500May 14


(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 returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment.

Cash 3,430

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Accounts payable 3,500June 3


Cash 3,500


Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:

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Should discounts be taken when offered?

Purchase Discounts


Discount of 2% on $3,500 70.00$

$3,500 invested at 10% f or 20 days 19.18

Savings by taking the discount 50.82$

Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days.


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Merchandise I nventory

Debit Credit

$3,800 8th - Return$300

Balance

4th - Purchase

$3,580$3,580

70 14th - Discount


Summary of Purchasing Summary of Purchasing TransactionsTransactions

1506th – Freight-in

IllustrationIllustration


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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.

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

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

Illustration 5-5

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Two Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales XXX



#1

Cost of goods sold XXX

Merchandise inventory XXX

#2

Selling

Price

Cost

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Accounts receivable 3,800May 4

Sales 3,800

Illustration: Assume PW Audio Supply records its May 4 sale 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 and

allowances as a percentage of sales.

could distort comparisons between total sales

in different accounting periods.

Sales Returns and Allowances



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Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective.



Sales returns and allowances 300May 8

Accounts receivable300


Cost of goods sold140

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Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries:




Accounts receivable300


Cost of goods sold50

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The cost of goods sold is determined and recorded each time a sale occurs in:

a. periodic inventory system only.

b. a perpetual inventory system only.

c. both a periodic and perpetual inventory system.

d. neither a periodic nor perpetual inventory system.

Review QuestionReview Question



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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 receivable3,500

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 returns and allowances of $300) on May 14, the last day of the discount 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 and Cost of Goods Sold.

Adjusting Entries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

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

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

Illustration: Suppose that PW Audio Supply has an unadjusted balance of $40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is $40,000. The company would make an adjusting entry as follows.

Cost of goods sold 500

Merchandise inventory500

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Closing Entries

Dividends

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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

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

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Illustration 5-8

Income Statement Presentation of Sales

Multiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income StatementMultiple-Step Income Statement


39 SO 6 Explain the computation and importance of gross SO 6 Explain the computation and importance of gross

profit.profit.

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

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Forms of Forms of Financial Financial StatementStatementss



Net salesNet sales


Operating Operating expensesexpenses


Illustration 5-13

Multiple-Step

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Net salesNet sales


Operating Operating expensesexpenses

Nonoperating Nonoperating activitiesactivities

Net incomeNet income


Illustration 5-13

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The multiple-step income statement for a merchandiser shows each of the following features except:

a. gross profit.

b. cost of goods sold.

c. a sales revenue section.

d. investing activities section.

Review QuestionReview 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 profit until 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 account of changes in inventory.

Ending inventory determined by physical count.

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

Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

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Calculation of Cost of Goods Sold

$316,000

Illustration 5A-1


Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

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Illustration:Illustration: On the basis of the sales invoice (Illustration

5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows.

Purchases 3,800May 4

Accounts payable 3,800

Recording Purchases under Periodic Recording Purchases under Periodic SystemSystemRecording Purchases under Periodic Recording Purchases under Periodic SystemSystem

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Illustration:Illustration: If Sauk pays Acme Freight Company $150for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is:

Freight-in (Transportation-in) 150May 6

Cash 150

Freight CostsFreight Costs


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Illustration:Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return.

Accounts payable 300May 8

Purchase returns and allowances 300

Purchase Returns and Purchase Returns and AllowancesAllowances


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Illustration:Illustration: On May 14 Sauk Stereo pays the balance due on account 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 DiscountsPurchase Discounts

Cash 3,430


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


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

Accounts receivable 3,800May 4

Sales 3,800

Recording Sales under Periodic Recording Sales under Periodic SystemSystemRecording Sales under Periodic Recording Sales under Periodic SystemSystem

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Illustration:Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows.


Accounts receivable 300

Sales Returns and AllowancesSales Returns and Allowances


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Illustration: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 Sauk’s account receivable in full as follows.

Sales DiscountsSales Discounts

Cash 3,430May 14

Accounts receivable3,500

Sales discounts 70


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Illustration 5A-2

Comparison of Entries-Perpetual vs. Comparison of Entries-Perpetual vs. Periodic Periodic Comparison of Entries-Perpetual vs. Comparison of Entries-Perpetual vs. Periodic Periodic

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Illustration 5A-2

Comparison of Entries-Perpetual vs. Comparison of Entries-Perpetual vs. Periodic Periodic Comparison of Entries-Perpetual vs. Comparison of Entries-Perpetual vs. Periodic Periodic

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Illustration 5B-1

SO 8SO 8

Worksheet for a Merchandising Worksheet for a Merchandising Company Company Worksheet for a Merchandising Worksheet for a Merchandising Company Company

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