Chapter Three Accounting for Merchandising Businesses © 2015 McGraw-Hill Education.

Chapter Three

Accounting for Merchandising

Businesses

© 2015 McGraw-Hill Education.

Comparative Income Statements

3-2

Allocating Inventory Cost Between Asset and Expense

Accounts

Beginning Inventory Balance

+

Inventory Purchased During the

Period

=

Cost of Goods

Available for Sale

Cost of Goods Available for Sale

Merchandise Inventory

(Balance Sheet)

Cost of Goods Sold (Income Statement)

3-3

Perpetual Inventory System

Perpetual Inventory System

Inventory account is adjusted

perpetually (continually)

throughout the accounting period.

Inventory increased for each item purchased

Inventory decreased for each item sold

3-4

Event 1: JPS acquired $15,000 by issuing common stock.

1. Increase assets (cash).

2. Increase equity (common stock).

Asset Source Transaction

= Liab. +

Cash + Inventory = + Common

Stock + Retained Earnings Revenue - Expenses =

Net Income Cash Flow

15,000 + n/a = n/a + 15,000 + n/a n/a - n/a = n/a 15,000 FA

Assets Stockholders' Equity

Event 2: JPS purchased merchandise inventory for $14,000 cash.

1. Decrease assets (cash).

2. Increase assets (merchandise inventory).

Asset Exchange Transaction

= Liab. +



Net Income

Cash Flow

(14,000) + 14,000 = n/a + n/a + n/a n/a - n/a = n/a (14,000) OA


3-5

Event 3a: JPS recognized sales revenue from selling inventory for $12,000.


2. Increase equity (sales revenue).


= Liab. +




12,000 + n/a = n/a + n/a + 12,000 12,000 - n/a = 12,000 12,000 OA


Event 3b: JPS recognized $8,000 of cost of goods sold.

1. Decrease assets (merchandise inventory).

2. Decrease equity (cost of goods sold).

Asset Use Transaction

= Liab. +



Net Income

Cash Flow

n/a + (8,000) = n/a + n/a + (8,000) n/a - 8,000 = (8,000) n/a


3-6

Event 4: JPS paid $1,000 cash for selling expenses.


2. Decrease equity (selling expenses).


= Liab. +




(1,000) + n/a = n/a + n/a + (1,000) n/a - 1,000 = (1,000) (1,000) OA


Event 5: JPS paid $5,500 cash to purchase land to locate a future store.

1. Decrease assets (cash)

2. Increase assets (land).Asset Exchange

Transaction

= Liab. +

Cash + Land = + Common

Stock +

Retained

Earnings Revenue - Expenses = Net

Income Cash Flow (5,500) + 5,500 = n/a + n/a + n/a - = (5,500) IA


Inventory n/a

+ n/a n/a n/a +

3-7

Financial Statements

3-8

Event 2: JPS purchased merchandise inventory on account with a list price of $11,000.

1. Increase assets (inventory).

2. Increase liabilities (accounts payable).


Event 1: JPS borrowed $4,000 cash by issuing a note payable.


2. Increase liabilities ( notes payable).


= Liab. +

Cash + Accts. Rec. + Inventory =

Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


4,000 + n/a + = + n/a + n/a n/a - n/a = n/a


+ +

n/aLand

+

+ Notes.

Pay 4,000 n/a FA4,000 n/a

= Liab. +


Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


n/a + n/a + 11,000 = 11,000 + n/a + n/a n/a - n/a = n/a n/a


+ +

n/aLand

Notes

pay n/a

3-9

Event 3: JPS returned some of the merchandise purchased in Event 2. The list price of the returned merchandise was $1,000.


2. Decrease liabilities (accounts payable).


= Liab. +


Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


n/a + n/a + (1,000) = (1,000) + n/a + n/a n/a - n/a = n/a n/a


+ +

n/aLand

Notes

pay n/a

Event 4: JPS received a cash discount on goods purchased in Event 2. The credit terms were 2/10,n/30.




= Liab. +


Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


n/a + n/a + (200) = (200) + n/a + n/a n/a - n/a = n/a n/a


+ +

n/aLand

Notes

pay n/a

3-10

Event 5: JPS paid the $9,800 balance due on the account payable.




Event 6: The shipping terms for the inventory purchased in Event 2 were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise.

= Liab. +Assets Stockholders' Equity


Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


(9,800) + n/a + n/a = (9,800) + n/a + n/a n/a - n/a = n/a (9,800) OA + +

n/aLand

Notes

pay n/a



Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


(300) + n/a + 300 = + n/a + n/a n/a - n/a = n/a (300) OA + +

n/a

Land

Notes

pay

n/a n/a

1. Decrease assets (cash)

2. Increase assets (inventory). Asset Exchange Transaction

3-11

Event 7a: JPS recognized $24,750 of revenue on the cash sale of merchandise that cost $11,500.






Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


24,750 + n/a + = + n/a + 24,750 24,750 - n/a = 24,750 24,750 OA + +

n/a

Land

Notes

pay

n/a n/an/a







Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


+ n/a + = + n/a + (11,500) - 11,500 = (11,500) + +

n/a

Land

Notes

pay

n/a n/an/a (11,500) n/a n/a

3-12

Event 8: JPS incurred $450 of freight costs on inventory delivered to customers, FOB Destination.


2. Decrease equity (transportation-out).


Buyer Seller

Freight Terms FOB Shipping Point FOB DestinationCost Title Transportation-in Transportation-out

Responsible Party



Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


+ n/a + = + n/a + (450) - 450 = (450) + +

n/a

Land

Notes

pay

n/a n/a(450) n/an/a (450) OA

3-13

Event 9: JPS paid $5,000 for selling and administration expenses.


2. Decrease equity (selling and administration exp.).




Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


+ n/a + = + n/a + (5,000) - 5,000 = (5,000) + +

n/a

Land

Notes

pay

n/a n/a(5,000) n/an/a (5,000) OA

Event 10: JPS paid $360 for interest expense.



Accts. Pay +

Com. Stk. +

RetEarn Rev - Exp =


+ n/a + = + n/a + (360) - 360 = (360) + +

n/a

Land

Notes

pay

n/a n/a(360) n/an/a (360) OA


2. Decrease equity (interest expense).


3-14

Event 11: JPS took a physical count of its inventory and found $4,100 of inventory on hand.

1. Decrease assets (inventory)

2. Decrease equity (loss on inventory shrinkage).


Assets = Liab. +

= +

Revenue - Expenses =

Net Income

Cash Flow

(500) n/a

n/a - 500 = (500)

Stockholders' Equity

(500) n/a

3-15

Event 12 : JPS sold the land that cost $5,500 for $6,200.

1. Decrease assets (land)

2. Increase assets (cash) Asset Exchange Transaction



Accts. Pay +

Com. Stk. +

RetEarn Gain - Exp =


+ n/a + = + n/a + 700 - = 700 + +

(5,500)

Land

Notes

pay

n/a n/a6,200 700n/a n/a 6,200 IA

3-16

Event 1a: JPS sold on account merchandise with a list price of $8,500. Payment terms were 1/10 n/30. The merchandise had cost JPS $4,000.

1. Increase assets (accounts receivable).



= Liab. +


NotesPay +

Com. Stk. +

Retained Earnings Revenue - Expenses =


n/a + 8,500 + n/a = n/a + n/a + 8,500 8,500 - n/a = 8,500 n/a






= Liab. +


NotesPay +

Com. Stk. +



n/a + n/a + (4,000) = n/a + n/a + (4,000) n/a - 4,000 = (4,000) n/a


3-17

Event 2a: The customer in Event 1a returned inventory with a $1,000 list price that JPS had sold. The merchandise had cost JPS $450.

1. Decrease assets (accounts receivable).

2. Decrease equity (retained earnings).


= Liab. +


NotePay +

Com. Stk. +


Net Income

Cash Flow

n/a + (1,000) + n/a = n/a + n/a + (1,000) (1,000) - n/a = (1,000) n/a


Event 2b: The $450 cost of goods sold is returned to inventory.

1. Increase assets (inventory).

2. Increase equity (retained earnings).


= Liab. +


NotePay +

Com. Stk. +


Net Income

Cash Flow

n/a + n/a + 450 = n/a + n/a + 450 n/a - (450) = 450 n/a


3-18

Event 3: JPS collected the balance of the account receivable from the customer that purchased the goods in Event 1a. The discount was 1/10, net 30. Payment is received within the discount period.

1. Decrease assets (accounts receivable).

2. Decrease equity (retained earnings).


= Liab. +


Accts. Pay +

Com. Stk. +

Retained Earnings Revenue - Expenses


7,425 + (7,425) + n/a = n/a + n/a + n/a n/a - n/a = n/a 7,425 OA


= Liab. +


NotesPay +

Com. Stk. +

Retained Earnings Revenue- Expenses=


+ (75) + n/a = n/a + n/a + (75) (75) - n/a = (75)


n/a n/a

1. Decrease assets (accounts receivable)


Asset Exchange Transaction

Event 3 ALT1: The collection occurs before the discount period has expired (within 10 days from the date of the sale).

3-19

Common Size Income Statements

* Since JPS did not offer sales discounts or have sales returns and allowances during 2014 or 2015, the amount of sales revenue is equal to the amount of net sales. We use the term net sales here because it is more commonly used in business practice. Percentages do not add exactly because they have been rounded.

3-20

Periodic Inventory SystemNo entries made in Inventory

account during periodCost of goods sold determined at

end of period

3-21

End of Chapter Three

3-22

Chapter Three Accounting for Merchandising Businesses © 2015 McGraw-Hill Education.

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