Financial Accounting: Tools for Business Decision Making, 2nd Ed.

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Financial AccountingTools for Business Decision
Making, 2nd Ed.
Kimmel, Weygandt, Kieso
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Chapter 5 Merchandising Operations

• After studying Chapter 5, you should be able to
  
• Identify the differences between a service
  enterprise and a merchandising company.
• Explain the recording of purchases under a
  perpetual inventory system.
• Explain the recording of sales revenues under a
  perpetual inventory system.
• Distinguish between a single-step and a
  multi-step income statement.
• Explain the factors affecting the profitability.

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Service enterprises perform services as their
primary source of revenue
Merchandising companies buy and sell merchandise
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Differences Between a Service Enterprise and a
Merchandising Company

• In a merchandising company, the primary source of
  revenues is the sale of merchandise, referred to
  as sales revenue or sales.
• Unlike expenses for a service company, expenses
  for a merchandising company are divided into two
  categories
• Cost of goods sold - the total cost of
  merchandise sold during the period.
• Operating expenses - selling and administrative
  expenses.

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Terms

• Sales revenue or sales sale of merchandise
• Cost of goods sold total cost of merchandise
  sold

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Illustration 5-1
Page 202 in book
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Operating cycle of a company is...
the average time it takes to go from cash to
cash in producing revenues.
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Operating cycle of a merchandising company is...

• ordinarily longer than than that of a service
  company
• purchase of merchandise and its sale lengthens
  the cycle.

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Illustration 5-2
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Inventory Systems

• Perpetual - detailed inventory system in which
  the cost of inventory is maintained and the
  records continuously show the inventory that
  should be on hand
• Periodic -inventory system in which detailed
  records are not maintained and the cost is goods
  sold is determined only at end of accounting
  period

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Illustration 5-3
Comparing Periodic and Perpetual Inventory
Systems
Item Sold
Inventory Purchased
End of Period
Perpetual
Perpetual
No Entry
Record Purchase of Inventory
Record Revenue and Cost of Goods Sold
End of Period
Inventory Purchased
Item Sold
Periodic
Record Purchase of Inventory
Record Revenue Only
Compute Cost of Goods Sold
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Computers
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and electronic scannershave enabled many
companies to install perpetual inventory systems
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What Is Charged to Merchandise Inventory?

• All Costs of getting the inventory to company and
  ready to sell
• Freight-In
• Special Permits
• Only costs associated with merchandise purchased
  for resale - not assets acquired for use, such
  as supplies

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Merchandise Purchases
On May 4 the company bought 3,800 worth of
merchandise from PW Audio Supply, Inc.
TaskRecord the purchase by getting
information from the Purchase Invoice. The
Purchase Invoice is a copy of the sales invoice.
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• 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
Illustration 5-4
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
Date5/4/01 Salesperson Maone Terms 2/10,n/30
Freight Paid by Buyer
Catalog No. Description
QTY Price Amount
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Merchandise Purchases
On May 4 the company bought 3,800 worth of
merchandise from PW Audio Supply, Inc.
Accounts Payable
Merchandise Inventory
Freight-out

May 4 3,800
May 4 3,800
GENERAL JOURNAL
Debit Credit May 4
Merchandise Inventory
3,800
Accounts Payable
3,800
To record goods purchased on account
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Purchases Returns and Allowances
On May 8 the company returned 300 worth of
merchandise to PW Audio Supply, Inc.
Accounts Payable
Merchandise Inventory
Freight-out

May 4 3,800
May 4 3,800
May 8 300
May 8 300
GENERAL JOURNAL
Debit Credit May 8
Accounts Payable
300
Merchandise Inventory
300 To
record goods returned that were purchased on
account
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Freight Costs - On Incoming Inventory
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Freight Costs - On Incoming Inventory
On May 6 the company paid 150 to have the
merchandise inventory delivered to them.
Merchandise Inventory
Freight-Out
Cash

May 4 3,800
May 6 150
May 8 300
May 6 150
GENERAL JOURNAL
Debit Credit May 6
Merchandise Inventory
150 Cash

150
To record payment of freight.
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Freight Costs - On Outgoing Inventory
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Freight Costs-on outgoing inventory
On May 6 the seller company paid 150 to have
merchandise inventory delivered to the buyer.
Merchandise Inventory
Freight-Out
Cash

May 6 150
May 6 150
GENERAL JOURNAL
Debit Credit May 6
Freight-Out
150
Cash
150
To record payment of freight on goods
sold.
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Purchase Discounts

• Credit terms of a purchase on account may permit
  the buyer to claim a cash discount for prompt
  payment.
• Credit terms specify the amount of cash discounts
  and the time period during which it is offered.
• 2/10,n/30
• 1/10 EOM

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Purchases 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
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Purchases 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.
Accounts Payable
Merchandise Inventory
Cash

May 4 3,800
May 4 3,800
May 8 300
May 8 300
May 14 70
May 14 3430
May 14 3,500
GENERAL JOURNAL
Debit Credit May 14
Accounts Payable
3,500 Cash

3,430
Merchandise
Inventory
70
To record payment within discount
period.
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Sales Invoice ...

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

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• 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
Illustration 5-4
Attention o f James Hoover, Purchasing Agent
Address 125 Main Street
Date 5/4/01 Salesperson Maone Terms 2/10,n/30
Freight Paid by Buyer
Catalog No. Description
QTY Price Amount
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Sales Revenues - Under a Perpetual System

• are recorded when earned-revenue recognition
  principle
• must be supported by a business document-written
  evidence
• 2 entries are made for each sale
• one to record sale
• one to record cost of merchandise sold

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Sales - under a perpetual system Assume a CASH
sale of 2,200
For merchandise having a cost of 1,400
May 4 2,200
May 4 1.400

May 4 2,200
May 4 1.400
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Sales Returns and Allowances

• Flip side of purchase returns and allowance

On buyers books GENERAL JOURNAL
Debit
Credit May 8 Accounts Payable
300
Merchandise Inventory
300
To record goods returned that were
purchased on account
On sellers books GENERAL JOURNAL
Debit
Credit May 8 Sales Returns and Allowance
300
Accounts Receivable
300
To record return of goods delivered to Sauk
Stero
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Sales - under a perpetual system Assume a sale
of 3,800 ON ACCOUNT
For merchandise having a cost of 2,400
May 4 2,400
May 4 3,800

May 4 3,800
May 2,400
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What Is the Sales Returns and Allowances Account?

• Contra Revenue Account to sales
• Used to show how much came in on returns and
  allowances

• Excessive returns and allowances suggest
• inferior merchandise
• inefficiencies in filing orders
• errors in billing customers
• mistakes in delivery or shipment of goods

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What Is the Sales Discount Account?

• Contra Revenue Account to sales
• Used to disclose amount of cash discounts taken
  by customers

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Sales Discounts

• Flip side of purchase discounts

On buyers books GENERAL JOURNAL
Debit
Credit May 14 Accounts Payable
3,500



Cash

3,430 Merchandise Inventory
70
To record payment within discount
period
On sellers books GENERAL JOURNAL
Debit
Credit May 14 Cash
3,430 Sales
Discounts 70
Accounts Receivable
3500
To record collection within
discount period
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Two Forms OfIncome Statements

• Single-step income statement
• Multiple-step income statement

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Single-Step Income Statement

• One step subtract total expenses from total
  revenues

Revenues 10,000 Expenses 3,000 Net
income 7,000
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PW AUDIO, Inc.Single-step Income StatementFor
the Year Ended December 31, 2001
Illustration 5-9

• Sales 460,000
• Interest Revenue 3,000
• Gain on Sale of equipment 600
• Total Revenues 463,600
• Expenses
• Cost of goods sold 316,000
• Selling expenses 76,000
• Administrative expenses 38,000
• Interest expense 1,800
• Casualty Loss from vandalism 200
• Income tax expense 10,100
• Total expenses 442,100
• Net income
  
  21,500

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PW AUDIO SUPPLY, INC.Multi-step Income Statement
For the Year Ended December 31, 2001
Illustration 5-9
Sales revenues Sales 480,000 Less Sales
returns and allowance 12,000 Sales
discounts 8,000
20,000 Net sales 460,000 Cost of goods
sold 316,000 Gross profit
144,000 Operating 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
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PW AUDIO SUPPLY, INC.Multi-step Income
Statement For the Year Ended December 31, 2001
Illustration 5-9
Income from operations (continued)
30,000 Other revenues and gains Interest
revenue
3,000 Gain on sale of equipment
600

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

2,000
1,600 31,600 Income before income
income taxes Income tax expense

10,100 Net Income


21,500
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Gross Profit Rate

• Gross Profit
• Net Sales

Companys gross profit expressed as a percentage
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Operating Expenses To Sales Ratio

• Operating Expenses
• Net Sales

Many companies have improved the efficiency of
their operations, thus reducing the ratio of
operating expenses to sales.
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