1. Learning Objectives 1. Identify the components in measuring net income in a merchandising...
-
Upload
amberlynn-harrington -
Category
Documents
-
view
214 -
download
1
Transcript of 1. Learning Objectives 1. Identify the components in measuring net income in a merchandising...
1
Learning Objectives1. Identify the components in measuring net
income in a merchandising company.2. Explain the entries for sales revenues.3. State the steps in determining cost of
good sold.4. Explain the computation and importance
of gross profit.5. Identify the unique features of the income
statement for a merchandising company.6. Explain the steps in the accounting cycle
for a merchandising company.7. Distinguish between a multiple-step and a
single step income statement.
2
3
Accounting for Merchandising Operation
Measuring Net Income
Completing the Accounting Cycle
1. Sales Revenue2. Cost of Good Sold3. Gross Profit4. Operating Expenses5. Income Statement /
Net Income
1. Using a work sheet2. Preparing FS3. Adjusting and closing
Entries4. Post-closing Trial
Balance5. Summary of entries6. Form of income
statements
4
Income Measurement Process
Sales Revenue
Cost of Good Sold
Gross Profit
Operating Expenses
Net Income
5
Time Line of Business Issues Involved With Inventory
COMPUTEBUY
Raw Materials or Goods for Resale
Value
ADD SELL
Finished Inventory
Ending InventoryCost of
Goods Sold
6
What Is Inventory?
Inventory designates goods held for sale in the normal course of business and, in the case of a manufacturer,
goods in production or to be placed in production.
Inventory designates goods held for sale in the normal course of business and, in the case of a manufacturer,
goods in production or to be placed in production.
7
Raw Materials
Raw Materials are goods acquired for use in the
production process.
Raw Materials are goods acquired for use in the
production process.Materials that are used
directly in the production of goods are frequently
referred to as direct materials.
Materials that are used directly in the production of goods are frequently
referred to as direct materials.
Materials that are necessary in the
production process but are not directly
incorporated into the product are referred to as
indirect materials.
Materials that are necessary in the
production process but are not directly
incorporated into the product are referred to as
indirect materials.
8
Work in Process
Work in process consists of materials partly processed and requiring further work before they can be sold. This inventory includes three cost elements.1. Direct materials
2. Direct labor
3. Manufacturing overhead
9
Finished Goods
Finished goods are the manufactured products awaiting sale.
Raw Materials
Raw Materials
Finished Goods
Finished Goods
Cost of Goods Sold
Cost of Goods Sold
Balance Sheet Income Statement
Direct Labor
Work in Process
Work in Process
Manufacturing Overhead
Summary
10
MerchandiseMerchandiseMerchandiseMerchandise
Balance Sheet Items
IncomeStatement
Items
RetailerCost of Cost of
Goods SoldGoods SoldCost of Cost of
Goods SoldGoods SoldSale
Manufacturer
Raw Raw MaterialsMaterials
Raw Raw MaterialsMaterials
Cost of Cost of Goods SoldGoods Sold
Cost of Cost of Goods SoldGoods Sold
Sale
Finished Goods
Finished Goods
Work in Work in Process Process Work in Work in Process Process
OverheadDirectLabor
Periodic Inventory Systems Cost of Goods Sold is determined and
Inventory is adjusted to proper balance at period end.
All purchases of inventoriable merchandise are recorded in the Purchases account.
Ending inventory is determined by physical count of merchandise on hand.
11
12
12Perpetual Inventory Systems
Cost of Goods Sold is determined and Inventory is adjusted to proper balance each time inventory is purchased or sold.
All purchases of inventoriable goods are recorded in the Inventory account.
13
13
Purchases of Inventory
Periodic MethodPurchases 3,000
Accounts Payable 3,000
Perpetual MethodInventory 3,000
Accounts Payable 3,000
Inventory Systems
14
14
Sales During the Period
Periodic MethodAccounts Receivable 4,125
Sales 4,125
Perpetual MethodAccounts Receivable 4,125
Sales 4,125Cost of Goods Sold 2,750
Inventory 2,750
Inventory Systems
15
Sales During the Period
Accounts Receivable 3,800Sales 3,800
OR
Cash 4,125 Sales 4,125
16
Sales Return and Allowance
Sales Return and Allowance 300 Accounts Receivable 300
Sales Discounts
Cash 3,430Sales Discounts 70 Accounts Receivable 3,500
17
Cost of Goods Sold
Recording Purchases of Merchandise
Purchases 3,800Accounts Payable 3,800
Purchase Returns and Allowances
Accounts Payable 300Purchase Return and Allowances 300
1818
Cost of Goods Sold
Purchase Discounts
Accounts Payable 3,500Purchase Discounts 70Cash 3,430
Accounts Payable 3,500Cash 3,500
Whose Inventory Is It?
• Goods in Inventory.• Goods in Transit.
–FOB Shipping Point: buyer’s inventory from time of shipment.–FOB Destination: seller’s inventory
until receipt by buyer.• Goods on Consignment: inventory of the
consignor, not the consignee.
19
20
Goods in Transit
Quality
Produce
Goods being shipped are included in inventory of buyer while in transit.
Goods being shipped are included in inventory of buyer while in transit.
FOB Shipping PointFOB Shipping PointFOB Shipping PointFOB Shipping Point
Seller Buyer
21
FOB DestinationFOB DestinationFOB DestinationFOB Destination
Quality
Produce
Goods being shipped are included in inventory of seller until received by buyer.
Goods being shipped are included in inventory of seller until received by buyer.
Seller Buyer
Goods in Transit
22
Goods on Consignment
Title to goods sold on consignment remains with the shipper until
their sale or use by the dealer or customer.
Title to goods sold on consignment remains with the shipper until
their sale or use by the dealer or customer.
What Is Inventory Cost?
• Inventory Cost is all expenditures related to inventory acquisition, preparation, and placement for sale.
• Trade Discounts–Convert the catalog price to the actual price.–Record inventory at discounted price.
• Cash Discounts–Granted for payment of invoices within a
limited time period.–Record inventory using the net method or
gross method.
23
24
Purchase Date
End of Discount Period
$9,800 Owed
$10,000 Owed
Final Payment
Date
10 Days 20 Days
Supplier “Loan” Period
Cash Discounts
Determining Cost of Goods on Hand
• Computing the units on hand for each item of inventory.
• Applying unit costs to the total units on hand for each item of inventory.
• Aggregating the costs for each item of inventory to determine the total cost of goods on hand.
25
Computing Cost of Goods Sold
• Add the cost of goods purchased to the cost of goods on hand at the beginning of the period (beginning inventory) to obtain the cost of goods available for sale.
• Subtract the cost of goods on hand at the end of the period (ending inventory) from the cost of goods available for sale to arrive at the cost of goods sold.
26
27
27
Revenue $xxxCosts and expenses:
Costs of sales xxxSelling and administrative xxxInterest expense xxxOther income/expense, net xxxRestructuring charge xxx Total costs and expenses xxxIncome before income taxes xxIncome taxes xxNet income $ xx
Single-Step Single-Step Income Income
StatementStatement
Single-Step Single-Step Income Income
StatementStatement
Form of the Income Statement
28
28
Revenue $xxxCosts of goods sold:
Beginning inventory xxxNet purchases xxxCost of goods available for sale xxxLess ending inventory xxx xxx
Gross profit on sales xxxOperating expenses:
Selling expenses xxxGeneral expenses xxx xxx
Other income xxx
Multiple-Step Multiple-Step Income Income
StatementStatement
Multiple-Step Multiple-Step Income Income
StatementStatement
Form of the Income Statement
ContinuedContinuedContinuedContinued
29
29
Other income (from previous page) $xxx Other revenue and gains xxx Other expenses and losses (xxx)Income from continuing operations before income taxes xxx Income taxes on continuing operations (xxx)Discontinued operations:
Loss from operations of discontinued business segment (net of tax) $xxxLoss on disposal of segment (net of tax) xxx (xxx)
Extraordinary gain (net of tax) xxx Net income $xxx
Form of the Income Statement
30
30Components of the Income Statement
Income from Continuing OperationsIncome from Continuing OperationsIncome from Continuing OperationsIncome from Continuing Operations
1. Revenue2. Cost of goods sold3. Operating expenses4. Other revenues and gains5. Other expenses and losses6. Income taxes on continuing operations
31
31Components of the Income Statement
Income from Continuing OperationsIncome from Continuing OperationsIncome from Continuing OperationsIncome from Continuing Operations
Determining Subtotals
Gross profit:Revenue – Cost of goods sold
Operating income:Gross profit – Operating expenses
ContinuedContinuedContinuedContinued
32
32Components of the Income Statement
Income from Continuing OperationsIncome from Continuing OperationsIncome from Continuing OperationsIncome from Continuing Operations
Determining SubtotalsIncome from continuing operations before income taxes:
Operating income + Other revenues and gain – Other expenses and losses
Income from continuing operations:Income from continuing operations before income taxes – Income taxes on continuing operations
33
33Components of the Income Statement
RevenueRevenue
Revenue reports the total sales to
customers for the period less any sales
returns and allowances or
discounts.
34
34Components of the Income Statement
Cost of Goods Sold
Beginning inventory
+ Net purchases
+ Freight-in
+ Other inventory acquisition costs
= Cost of goods available for sale
– Ending inventory
= Cost of goods sold
35
35Components of the Income Statement
Cost of Goods Sold
Cost of goods sold is a significant item on merchandising and manufacturing companies’
income statement.
36
36Components of the Income Statement
Gross Profit
Net sales
– Cost of goods sold
= Gross profit
Gross profit ÷ Net sales = Gross profit percentage
Gross profit ÷ Net sales = Gross profit percentage
37
37Components of the Income Statement
Operating Expenses
Operating expenses may be reported in two parts:
1) Selling expenses
2) General and administrative expenses
38
38Components of the Income Statement
Operating Income
Operating income measures the performance of the fundamental business operations conducted by a company.
Gross profit
– Operating expenses
= Operating income
39
39Components of the Income Statement
Other Revenues and Gains
This section usually includes items identified with the peripheral
activities of the company.1) Rent revenue2) Interest revenue3) Dividend revenue4) Gains from the sale of
assets
40
40Components of the Income Statement
Other Expenses and Losses
This section parallels “Other Revenues and Gains” except the items result in deductions from
operating income.1) Interest expense2) Losses from the sale
of assets
41
41
Discontinued Operations
Why would management decide to dispose of a component of a business? The component may be unprofitable. The component may not fit into the long-
range plans for the company. Management may need funds to reduce
long-term debit or to expand into other areas.
Management may be fearful of a corporate takeover.
42
42Discontinued Operations
• Income statement section consists of two parts:– Income (loss) from operations--disclosed only
if decision to discontinue operations is made after beginning of the year.
– Gain (loss) on disposal of operations-- consisting of income (loss) during phase out and gain (loss) from disposal of segment assets.
43
43Discontinued Operations
According to FASB Statement No. 144, if on the balance sheet date assets
and liabilities associated with discontinued components have not
been completely disposed, they are to be listed separately in the asset and
liability sections of the balance sheet.
According to FASB Statement No. 144, if on the balance sheet date assets
and liabilities associated with discontinued components have not
been completely disposed, they are to be listed separately in the asset and
liability sections of the balance sheet.
44
44
Discontinued Operations
In addition to the summary income or loss number reported in the income
statement, the total revenue associated with the discontinued operations should be disclosed in the financial statement
notes.
In addition to the summary income or loss number reported in the income
statement, the total revenue associated with the discontinued operations should be disclosed in the financial statement
notes.
45
45
Extraordinary Items
Extraordinary items must be both unusual
and infrequent.
46
46Never Extraordinary
Write-down or write-off of receivables, inventory, etc.
Gains or losses from exchange or remeasurement of foreign currencies.
Gains or losses on disposal of business segment.
Gains or losses from sale or abandonment of productive assets.
Effects of a strike. Adjustment of accruals on long-term
contracts.
47