Accounting for Merchandising Operations Chapter 5 PowerPoint Editor:

Accounting for Merchandising Operations Chapter 5 PowerPoint Editor:

Accounting for Merchandising Operations Chapter 5 PowerPoint Editor: Beth Kane, MBA, CPA Wild, Shaw, and Chiappetta Fundamental Accounting Principles 22nd Edition Copyright 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 05-C1: Merchandising Activities 2 5- 3

Service Companies Service organizations sell time to earn revenue. Examples: Accounting firms, law firms, and plumbing services C1 3 5- 4 Merchandiser Merchandising Companies Manufacturer C1 Wholesaler Retailer

Consumers 4 5- 5 Reporting Income for a Merchandiser Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores C1 5 05-C2: Reporting Inventory for a Merchandiser 6 5- 7

Operating Cycle for a Merchandiser Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. C2 7 5- 8 Inventory Systems C2 8 5- 9 Inventory Systems

Perpetual systems continually update accounting records for merchandising transactions C2 Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period 9 05-P1: Accounting for Merchandise Purchases 10

Merchandise Purchases On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash. P1 11 Trade Discounts P1 12 5- 13 Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due. P1

13 5- 14 Purchase Discounts 2/10, n/30 Discount Discount Percent Percent P1 Number Number of of Days Days Discount Discount Is Is Available

Available Otherwise, Otherwise, Net Net (or (or All) All) Is Is Due Due in in 30 30 Days Days Credit Credit Period Period 14

5- 15 Purchase Discounts On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. P1 15 5- 16 Purchase Discounts On November 12, Z-Mart paid the amount due on the purchase of November 2. P1 16 5- 17

Purchase Discounts After we post these entries, the accounts involved look like these: P1 17 5- 18 Purchase Returns and Allowances Purchase Return . . . Merchandise Merchandise returned returned by by the the purchaser purchaser to to the the

supplier. supplier. Purchase Allowance . . . AA reduction reduction in in the the cost cost of of defective defective or or unacceptable unacceptable merchandise merchandise received received by by aa purchaser purchaser from from aa supplier. supplier. P1

18 5- 19 Purchase Returns and Allowances On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. P1 19 5- 20 Purchase Returns and Allowances Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance.

P1 20 5- 21 Transportation Costs and Ownership Transfer P1 21 5- 22 Transportation Costs Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. P1

22 5- 23 Accounting for Merchandise P1 23 NEED-TO-KNOW Prepare journal entries to record each of the following purchases transactions of a merchandising company. Assume a perpetual inventory system. Oct. 1 Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase. Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit. Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7. Oct. 31 Assume the October 11 payment was never made and, instead, payment of

the amount due on the October 1 purchase, less the return on October 7, occurred on October 31. P1 P1 24 NEED-TO-KNOW Oct. 1 Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase. Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit. Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7. Oct. 1 Oct. 3 Oct. 31

Merchandise inventory 500 30 Oct. 7 Oct. 11 324 Date Oct. 1 Oct. 3 Oct. 7 Oct. 11 P1 200 6 Oct. 7 Oct. 11

General Journal Merchandise inventory (125 units @ $4) Accounts payable Merchandise inventory Cash Accounts payable (50 units @ $4) Merchandise inventory (50 units @ $4) Accounts payable Merchandise inventory ($300 x .02) Cash Accounts payable Oct. 1 200 300 Debit 500 500

Credit 500 30 30 200 200 300 6 294 25 NEED-TO-KNOW Oct. 1 Oct. 3 Oct. 7 Oct. 31 Oct. 1 Oct. 3

Oct. 31 Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1. Paid $30 cash for freight charges from UPS for the October 1 purchase. Returned 50 defective units from the October 1 purchase and received full credit. Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31. Merchandise inventory 500 30 Oct. 7 500 330 Date Oct. 1 Oct. 3

Oct. 7 Oct. 31 P1 200 Oct. 7 Oct. 31 Accounts payable Oct. 1 200 300 General Journal Merchandise inventory (125 units @ $4) Accounts payable Merchandise inventory Cash

Accounts payable Merchandise inventory (50 units @ $4) Accounts payable Cash Debit 500 Credit 500 30 30 200 200 300 300 26 05-P2: Accounting for Merchandise Sales

27 5- 28 Accounting for Merchandise Sales P2 28 5- 29 Sales of Merchandise Each sales transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer. P2

Recognition of the cost of merchandise sold to a customer. 29 5- 30 Sales of Merchandise Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. P2 30 5- 31 Sales Discounts Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future

collection efforts. P2 31 5- 32 Sales Discounts Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. The account was paid in full within the 60-day period. The account was paid in full within the 10-day discount period. P2 32 5- 33 Sales Returns and Allowances

Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales. Sales returns refer to merchandise that customers return to the seller after a sale. P2 Sales allowances refer to reductions in the selling price of merchandise sold to customers. 33 5- 34 Sales Returns and Allowances Recall Z-Marts sale for $2,400 that had a cost of $1,600. Assume the customer returns

part of the merchandise. The returned items sell for $800 and cost $600. P2 34 5- 35 Sales Allowances Assume that $800 of the merchandise ZMart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. P2 35 NEED-TO-KNOW Prepare journal entries to record each of the following sales transactions of a merchandising company. Assume a perpetual inventory system. Jun. 1

Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit. Jun. 7 The customer returns 20 units because those units did not fit the customers needs. The seller restores those units to its inventory. Jun. 8 The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage. Jun. 11 The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate. The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory P2 36 NEED-TO-KNOW Jun. 1 Jun. 7

Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit. The customer returns 20 units because those units did not fit the customers needs. The seller restores those units to its inventory. Date Jun. 1 Jun. 1 Jun. 7 Jun. 7 P2 General Journal Accounts receivable Sales (500 @ $14)

Debit 7,000 Cost of goods sold (500 @ $10) Merchandise inventory 5,000 Sales returns and allowances (20 @ $14) Accounts receivable Merchandise inventory (20 @ $10) Cost of goods sold Credit 7,000 5,000 280 280 200 200

37 NEED-TO-KNOW Jun. 8 The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage. Jun. 11 The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate. The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory Date Jun. 1 Jun. 01 Jun. 07 Jun. 07 Jun. 08

Jun. 11 Jun. 11 P2 General Journal Accounts receivable Sales (500 @ $14) Debit 7,000 Cost of goods sold (500 @ $10) Merchandise inventory 5,000 Sales returns and allowances (20 @ $14) Accounts receivable Merchandise inventory (20 @ $10)

Cost of goods sold Credit 7,000 5,000 280 280 200 200 Sales returns and allowances Accounts receivable 90 Sales returns and allowances ($12 + (2 @ $14)) Accounts receivable 40 Merchandise inventory (2 @ $10)

Cost of goods sold 20 90 40 20 38 NEED-TO-KNOW Partial income statement Sales Sales returns and allowances Sales discounts Net sales Cost of goods sold Gross profit on sales Date Jun. 1

Jun. 01 Jun. 07 Jun. 07 Jun. 08 Jun. 11 P2 Jun. 11 $7,000 $410 0 (410) 6,590 4,780 $1,810

General Journal Accounts receivable Sales (500 @ $14) Debit 7,000 Cost of goods sold (500 @ $10) Merchandise inventory 5,000 Sales returns and allowances (20 @ $14) Accounts receivable Merchandise inventory (20 @ $10) Cost of goods sold Credit 7,000 5,000

280 280 200 200 Sales returns and allowances Accounts receivable 90 Sales returns and allowances ($12 + (2 @ $14)) Accounts receivable 40 Merchandise inventory (2 @ $10) Cost of goods sold 20 90

40 20 39 05-P3: Adjusting Entries for Merchandisers 40 Merchandising Cost Flow in the Accounting Cycle P2 41 5- 42 Adjusting Entries for Merchandisers

A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration. P3 42 5- 43 Closing Entries for Merchandisers P3 43 NEED-TO-KNOW A merchandising companys ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in

temporary revenue and expense accounts. Merchandise inventory Z. Zee, Capital Z. Zee, Withdrawals Sales Sales discounts $756 2,306 140 3,204 94 Sales returns and allowances Cost of goods sold Depreciation expense Salaries expense Other operating expenses Merchandise inventory Z. Zee, Capital Z. Zee, Withdrawals

Sales Sales discounts Sales returns and allowances Cost of goods sold Depreciation expense Salaries expense Other operating expenses P3 Debit $756 $130 2,100 206 650 100 Credit $2,306

140 3,204 94 130 2,100 206 650 100 44 NEED-TO-KNOW A merchandising companys ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts. Merchandise inventory Z. Zee, Capital Z. Zee, Withdrawals Sales Sales discounts

Sales returns and allowances Cost of goods sold Depreciation expense Salaries expense Other operating expenses Debit $756 $718 $2,306 140 3,204 94 130 2,100 2,138 206 650 100

Date General Journal May 31 Cost of Goods Sold Merchandise inventory ($756 - $718) P3 Credit Debit 38 Credit 38 45 NEED-TO-KNOW Merchandise inventory Z. Zee, Capital Z. Zee, Withdrawals Sales

Sales discounts Sales returns and allowances Cost of goods sold Depreciation expense Salaries expense Other operating expenses Date May 31 May 31 P3 Debit $756 $718 General Journal Sales Income Summary Income Summary Sales discounts

Sales returns and allowances Cost of Goods Sold ($2,100 + $38) Depreciation expense Salaries expense Other operating expenses Credit $2,306 140 3,204 94 130 2,100 2,138 206 650 100 Debit 3,204 Credit

3,204 3,318 94 130 2,138 206 650 100 46 05-P4: Financial Statement Formats 47 5- 48 P4 48

5- 49 Single-Step Income Statement P4 49 5- 50 Classified Balance Sheet Highly Liquid Less Liquid P4 50

NEED-TO-KNOW Assume Targets adjusted trial balance on April 30, 20X1, its fiscal year-end, follows. (a) Prepare a multiple-step income statement that includes separate categories for selling expenses and for general and administrative expenses. (b) Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses. Merchandise inventory Other (noninventory) assets Total liabilities Target, Capital Target, Withdrawals Sales Sales discounts Sales returns and allowances Cost of goods sold Sales salaries expense Rent expense - Selling space Store supplies expense Advertising expense Office salaries expense

Rent expense - Office space Office supplies expense Totals P4 Debit $820 2,608 Credit $500 2,091 160 4,512 45 240 1,490 640 160 30

260 570 72 8 $7,103 $7,103 51 NEED-TO-KNOW Merchandise inventory Other (noninventory) assets Total liabilities Target, Capital Target, Withdrawals Sales Sales discounts Sales returns and allowances Cost of goods sold Sales salaries expense Rent expense - Selling space Store supplies expense Advertising expense

Office salaries expense Rent expense - Office space Office supplies expense Totals P4 Debit $820 2,608 Credit $500 2,091 160 4,512 45 240 1,490 640 160

30 260 570 72 8 $7,103 $7,103 TARGET Income Statement For Year Ended April 30, 20X1 Sales $4,512 Less: Sales discounts $45 Sales returns and allowances 240 285 Net sales 4,227 Cost of goods sold 1,490 Gross profit

2,737 Expenses Selling expenses Sales salaries expense 640 Rent expense - Selling space 160 Store supplies expense 30 Advertising expense 260 Total selling expenses 1,090 General and administrative expenses Office salaries expense 570 Rent expense - Office space 72 Office supplies expense 8 Total general and administrative expenses 650

Total expenses 1,740 Net income $997 52 NEED-TO-KNOW TARGET Income Statement For Year Ended April 30, 20X1 Sales $4,512 Less: Sales discounts $45 Sales returns and allowances 240 285 Net sales 4,227 Cost of goods sold 1,490

Gross profit 2,737 Expenses Selling expenses Sales salaries expense 640 Rent expense - Selling space 160 Store supplies expense 30 Advertising expense 260 Total selling expenses 1,090 General and administrative expenses Office salaries expense 570 Rent expense - Office space 72 Office supplies expense 8 Total general and administrative expenses

650 Total expenses 1,740 Net income $997 P4 TARGET Income Statement For Year Ended April 30, 20X1 Net sales Expenses Cost of goods sold Selling expenses General and administrative expenses Total expenses Net income $4,227 1,490 1,090

650 3,230 $997 53 5- 54 Global View Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. 1. 2. 3. 4. 5. Income Statement Presentation Order of expenses Separate disclosures

Presentation of expenses Operating Income Alternative income 54 05-A1: Acid-Test Ratios 55 5- 56 Acid-Test Ratio Acid-test ratio Acid-test ratio = = Quick assets

Current liabilities Cash + S-t investments + Receivables Current liabilities A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. A1 56 05-A2: Gross Margin Ratios 57 5- 58 Gross Margin Ratio Gross margin = ratio

Net sales - Cost of goods sold Net sales Percentage of dollar sales available to cover expenses and provide a profit. A2 58 5- 59 JCPenney A1/A2 59 05-P5: Periodic & Perpetual Inventory Systems

60 5- 61 Appendix 5A: Periodic Inventory System (a) (b) (c) (d) (e) (f) (g) P5 A periodic

inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. 61 5- 62 Appendix 5A: Periodic Inventory System P5

62 5- 63 Appendix 5B: Work SheetPerpetual System P5 63 5- 64 End of Chapter 5 64

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