1. Accounting for Merchandising Operations Chapter 5

2. Learning Objectives

Describe merchandising activities and identify income components for a merchandising company.

Identify and explain the inventory asset of a merchandising company.

Describe both perpetual and periodic inventory systems.

Analyze and record transactions for merchandise purchases using a perpetual system .

Analyze and record transactions for merchandise sales using aperpetual system.

Analyze and interpret cost flows and operating activities of amerchandising company.

Prepare adjustments and close accounts for a merchandising company.

Define and prepare multiple-step and single-step income statements.

Record and compare merchandising transactions using both periodicand perpetual inventory systems.

3. Merchandising Activities

Service organizationssell timeto earn revenue.

• Examples: accounting firms, law firms, and plumbing services

Revenues Expenses Minus Net income Equals 4. Merchandising Activities Manufacturer Wholesaler Retailer Customer Merchandising Companies 5. Reporting Income for a Merchandiser

Merchandising companies sellproductsto earn revenue.

• Examples: sporting goods, clothing, and auto parts stores

Cost of Goods Sold Gross Profit Expenses Net Income Net Sales Minus Equals Minus Equals 6. Operating Cycle for a Merchandiser

Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.

Purchases Merchandise inventory Credit sales Account receivable Cash collection Purchases Merchandise inventory Cash sales Cash Sale Credit Sale 7. Inventory Systems + + Beginning inventory Net cost of purchases Merchandise available for sale Ending Inventory Cost of Goods Sold = 8. Inventory Systems Perpetual Inventory System Periodic Inventory System Detailed records of the cost of each item are maintained, and the costof each item sold is determinedfrom records when thesale occurs . Cost of goods sold is determinedonly at theend of an accountingperiod . Applied in this chapter 9. Accounting for Merchandise Purchases On 20 June, Jason Inc. purchased $14,000 of Merchandise Inventory paying cash. 10. Seller Invoice date Purchaser Order number Credit terms Freight terms Goods Invoice amount 11. Trade Discounts

Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.

Example Matrix, Inc. offers a 30% trade discount on orders of 1,000 units or more of their popular product Racer.EachRacer has a list price of $5.25. 12. Purchase Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

Terms Time Due Discount Period Full amount less discount Credit Period Full amount due Purchase or Sale 13. Purchase Discounts 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is DueCredit Period 14. Purchase Discounts

On 7 May, Jason Inc. purchased $27,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

15. Purchase Discounts

On 15 May, Jason Inc. paid the amount due on the purchase of 7 May.

$27,000 2%=$540 discount 16. Purchase Discounts

After we post these entries, the accounts involved look like this:

Merchandise Inventory Accounts Payable 5/727,000 5/727,000 5/15540 5/1527,000 Bal. 26,460 Bal.0 17. Failure to Pay Within the Discount Period

If we fail to take a 2/10, n/30 discount, is it really expensive?

365 days20 days2%= 36.5% annual rate Days in a year Number of additional days before payment Percent paid tokeepmoney 18. Purchase Returns and Allowances

Purchase Return . . .

• Merchandise returned by the purchaser to the supplier.

Purchase Allowance . . .

• A reduction in the cost of defective merchandise received by a purchaser from a supplier.

19. Purchase Returns and Allowances

On 9 May, Matrix Inc. purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.

20. Purchase Returns and Allowances

On 10 May, Matrix Inc. returned $500 of defective merchandise to the supplier.

21. Purchase Returns and Allowances

On 18 May, Matrix Inc. paid the amount owed for the purchase of 9 May.

22. Transportation Costs FOB shipping point (buyer pays) FOB destination (seller pays) Merchandise Seller Buyer 23. Transportation Costs

On 12 May, Jason Inc. purchased $8,000 of Merchandise Inventory for cash and also paid $100 transportation costs.

24. Quick Check On 6 July 2005Seller Co. sold $7,500 of merchandise to Buyer Co.; terms of 2/10,n/30.The shipping terms were FOB shipping point.The shipping cost was $100. Which of the following will be part of Buyers 6July journal entry?a. Credit Sales $7,500 b. Credit Purchase Discounts $150 c. Debit Merchandise Inventory $100 d. Debit Accounts Payable $7,450 FOB shipping point indicates the buyer ultimately pays the freight.This is recorded with a debit to Merchandise Inventory . 25. Itemized Cost of Merchandise Purchased 26. Accounting for Merchandise Sales Sales discounts and returns and allowances areContra Revenue accounts. 27. Sales of Merchandise

On 18 March, Diamond Store sold $25,000 of merchandise on account.The merchandise was carried in inventory at a cost of $18,000.

28. Sales Discounts

On 8 June, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Lets prepare the journal entries.

29. Sales Discounts

On 17 June, Barton Co. received a check for $5,880 in full payment of the 8 June sale.

30. Sales Returns and Allowances

On 12 June, Barton Co. sold merchandise costing $4,000 for $7,500 on accountThe credit terms were 2/10, n/30.

31. Sales Returns and Allowances

On 14 June, merchandise with a sales price of $800 and a cost of $470 was returned to Barton.The return is related to the 12 June sale.

32. Sales Returns and Allowances

On 20 June, Barton received the amount owed to it from the sale of 12 June.

33. Lets complete the accounting cycle by preparing the closing entriesfor Barton. 34. Step 1 :Close Credit Balances in Temporary Accounts to Income Summary. 35. Step 2 :Close Debit Balances in Temporary Accounts to Income Summary. 36. Step 3 :Close Income Summary to Owners Capital 37. Step 4 :Close Withdrawals Account to Owners Capital. 38. Income Statement Formats

Multiple-Step

Single-Step

39. Multiple-Step Income Statement 40. Single-Step Income Statement 41. Classified Balance Sheet 42. End of Chapter 5