LESSON 4-1 Responsibility Accounting for a Merchandising ... · PDF fileResponsibility...

CENTURY 21 ACCOUNTING © 2009 South-Western, Cengage Learning

LESSON 4-1

Responsibility Accounting for a Merchandising Business


Financial statements

What are financial statements? Summary of the financial information that a business records

Why are financial statements important to a business? They are analyzed to determine business’s financial position Managers use them to make business decisions Used in preparing tax reports and other reports, such as

those required by the SEC How often are financial statements prepared?

At least once a year – depends on the needs of the business

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LESSON 4-1


Fiscal period

The length of time for which a business summarizesand reports financial information (generally referred to as a year) Accounting Period Cycle concept – changes in financial

information are reported for a specific period of time in the form of financial statement

Zytech uses a calendar year

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LESSON 4-1


Responsibility Accounting

Assigning control of business revenues, costs, and expenses is a responsibility of a specific manager

Features of a responsibility accounting system1. Each manager is assigned responsibility for only those

revenues, costs, and expenses for which the manager can make decisions and affect the outcome.

2. These revenues, costs, and expenses must be readily identifiable with the manager’s unit.

An income statement reports net income earned during a fiscal period, but this information is not broken down by department; therefore merchandising businesses often prepare departmental statements.

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LESSON 4-1


Departmental Margin statement

Reports departmental Margin Total revenue earned by a department less its cost of merchandise sold and

less its direct expenses Direct expense

An operating expense identifiable with and chargeable to the operation of a specific department

Example – cost of supplies used by a specific department Indirect expense

An operating expense chargeable to overall business operations Example – cost of electricity (department manager would have little or no

control over the use of electricity in the department) Zytech’s departmental margin statements – pgs. 111/113 How does Zytech’s chart of accounts – pg. 3 - help to support it’s

reporting goals?

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LESSON 4-1


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LESSON 4-1

RECORDING A DIRECT EXPENSE page 90

The advertising promotes the department’s sale of audio equipment; since the department manager controls the advertising expense and the department receives the benefits, the expense is a direct expense.


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LESSON 4-1

RECORDING AN INDIRECT EXPENSE page 90

Indirect expenses are reported on the income statement but not the departmental margin statements.


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LESSON 4-1

TERMS REVIEW

fiscal period responsibility accounting direct expense indirect expense departmental margin departmental margin statement

page 91


LESSON 4-2

How do you prepare and interim Departmental Statement of Gross Profit?


Departmental Statement of Gross Profit

Gross profit The amount of revenue from sales less the cost of goods sold

Why analyze departmental gross profit data? Managers can determine the amount of potential revenue remaining

after the cost of merchandise has been deducted from net sales and make any necessary adjustments

What kinds of adjustments may be necessary? Adjust merchandise selling prices Change suppliers of merchandise Add, delete, or change products Discontinue a department

Gross profit information reflects changes between costs and selling prices

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LESSON 4-2


Determining Ending Merchandise Inventory

Beginning and ending inventory amounts are needed to prepare a departmental statement of gross profit

How can businesses keep track of inventory? Periodic/physical inventory

Merchandise inventory determined by counting, weighing, or measuring items on hand

Not always practical Perpetual inventory

Merchandise inventory determined by keeping a continuous record of increases, decreases, and balance on hand

Use of point-of-sale terminals or cash registers and barcodes on merchandise has made this type of inventory tracking common

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LESSON 4-2


Determining Ending Merchandise Inventory

Gross Profit method of estimating inventory Use when a perpetual inventory is not kept and a periodic inventory is

not practical Inventory is estimated by using the previous year’s percentage of

gross profit on operations

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LESSON 4-2


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LESSON 4-2

1. List beginning inventory.2. Determine net purchases.3. Calculate merchandise for sale.4. Determine net sales.

5. Calculate estimated gross profit.6. Calculate the estimated cost of

merchandise sold.7. Calculate estimated ending inventory.

ESTIMATING ENDING MERCHANDISE INVENTORY page 94

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LESSON 4-2

INTERIM DEPARTMENTAL STATEMENT OF GROSS PROFIT page 95

Component percentage – shows the relationship between one financial statement item and the total that includes that item

-usually calculated on Cost of merchandise sold, gross profit on operations, total operating expenses, net income before federal income tax


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LESSON 4-2

1. The cost of merchandise sold percentage:

2. The gross profit margin percentage:

.6076 or 60.8%=$42,186.47

$69,429.95

.3924 or 39.2%=$27,243.48

$69,429.95

COST OF MERCHANDISE SOLD AND GROSS PROFIT PERCENTAGES page 96

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How do you know if the component percentages are good or bad?

You must know the acceptable levels of performance Historical records provide percentages that can be compared across

time (significant changes should be investigated) Industry performance standards are also used for comparison

Published percentages – industry averages

Zytech should have a cost of merchandise sold percentage of 60% or less Analyze and comment on Zytech’s June performance

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LESSON 4-2


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LESSON 4-2

TERMS REVIEW

gross profit departmental statement of gross profit periodic inventory perpetual inventory gross profit method of estimating an inventory component percentage

page 97


LESSON 4-3

How do you prepare a Work Sheet for a Departmentalized Business?


Proving the Accuracy of posting to the subsidiary ledgers

Schedule of accounts receivable Total of all accounts receivable ledger accounts - List of customer

accounts, account balances, and total amount due from all customers Total must equal the GL controlling account – Accounts Receivable

Schedule of accounts payable Total of all accounts payable ledger accounts – list of vendor

accounts, account balances, and total amount due to all vendors Total must equal the GL controlling account – Accounts Payable

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LESSON 4-3


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LESSON 4-3

PROVING THE ACCURACY OF POSTING TO SUBSIDIARY LEDGERS page 99


Preparing an expanded worksheet Worksheet

A columnar accounting form used to summarize the general ledgerinformation needed to prepare financial statements

An expanded worksheet includes extra columns to sort information needed for departmental margin statements. (pgs. 102-103)

Trial Balance A proof of the equality of debits and credits in a general ledger Can be prepared at any time but should always be prepared as part of

the end-of-fiscal-period activities Accounts are listed in the same order they appear in the general

ledger All accounts are listed, regardless if there’s a balance or not Three income summary accounts are used Must be totaled and ruled

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LESSON 4-3


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LESSON 4-3

pages 102-103DEPARTMENTAL WORK SHEET


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LESSON 4-3

DEPARTMENTAL WORK SHEET pages 102-103


Adjustments on a Worksheet with Departmental Margins

The adjustments column is used to update certain general ledger accounts (ie. Uncollectible accounts expense, supplies used) Not all GL accounts are up to date

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LESSON 4-3


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LESSON 4-3

ADJUSTMENT INFORMATION page 104


Uncollectible Accounts Expense Adjustment

What happens when a business sells merchandise on account, but the customer is unable to pay? It is important that these expenses be recorded in the fiscal period in

which the expenses contribute to earnings revenue (CONCEPT: Matching Expenses with Revenue) Indirect expense Recorded on lines 4 and 66 on worksheet and labeled (a) because it’s the

first adjustment recorded

Uncollectible Accounts Expense 2,109.40Allow. For Uncollectible Accts. 2,109.40

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LESSON 4-3

PercentageTotal Saleson Account

Estimated Uncollectible Accounts Expense× =

$210,940.00 × = $2,109.401%


Merchandise Inventory Adjustment

Merchandise account balances on the trial balance are beginning inventory amounts for a fiscal period; a periodic inventory must be taken at the end of the year An adjustment must be made so that the balance on the worksheet

reflects the cost of merchandise reported on the periodic inventory Adjustment is made to the appropriate department’s merchandise

inventory account and income summary account (b)

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LESSON 4-3

Dec. 31 balance Beg. Bal (Trial Bal) Increase/decrease in Inv.Merch. Inv. – Audio - Merch Inv. – Audio = Adjustment Amt.$204,855.00 - $186,434.61 = $18,420.39

Merchandise Inventory – Audio $18,420.39Income Summary – Audio $18,420.39


Supplies Adjustment The supplies account does not reflect the cost of any of the

supplies used during the year, which is an operating expense Periodic inventory determines amount of ending inventory A record is kept throughout the year of which departments use

the supplies, so that these adjustments can be recorded by department Adjustments are made to the appropriate Supplies Expense accounts

and the Supplies accounts (d), (e), (f)

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LESSON 4-3

Beg. Bal (Trial Bal) Dec. 31 balance Supplies usedSupplies – Admin. - Supplies – Admin. = (Adjustment Amt.)$6,973.00 - $4,051.00 = $2,922.00

Supplies Expense – Admin. $2,922.00Supplies – Admin. $2,922.00


Prepaid Insurance Adjustment

Prepaid Insurance does not reflect the amount of insurance used during the year Adjustments made to Insurance Expense and Prepaid Insurance

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LESSON 4-3

Dec. 31 Bal (Trial Bal) Unexpired value Insurance usedPrepaid Insurance - Prepaid Insurance = (Adjustment Amt.)$9,850.00 - $4,200.00 = $5,650.00

Insurance Expense $5,650.00Prepaid Insurance $5,650.00


Depreciation Expense Adjustments

Plant assets Assets that will be used for a number of years in the operation of a

business Decrease in value because of passage of time, use, and the availability

of new models Depreciation Expense

Portion of a plant asset’s cost that is transferred to an expense account in each fiscal period during a plant asset’s useful life (operating expense)

Estimate – does not represent the actual decline in the value of an asset; instead it is a method of allocating the cost of an asset over the years it will be used to generate revenue

Adjustments made to Depreciation Expense and Accumulated Depreciation accounts

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LESSON 4-3


Federal Income Tax Expense Adjustment

Corporations anticipating federal income taxes of $500 or more are required to pay estimated taxes each quarter The actual income tax must be calculated at the end of each fiscal

year, and the appropriate adjustment must be made to Federal Income Tax Expense and Federal Income Tax Payable

After all adjustments have been made, the Adjustments columns are totaled, checked for equality, and ruled

Extend new balances to the appropriate columns and calculate Net Income/Loss

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LESSON 4-3


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LESSON 4-3

2. Write department loss in Income Statement Debit column.1. Write department loss in Departmental Margin Statement Credit column.

DEPARTMENTAL AND COMPANY LOSS ON A WORK SHEET

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page 109

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3. Record company loss in Income Statement Credit column.4. Record company loss in Balance Sheet Debit column.5. Add description.


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LESSON 4-3

TERMS REVIEW

schedule of accounts receivable schedule of accounts payable work sheet trial balance plant assets depreciation expense

page 110


LESSON 4-4

How do you prepare Responsibility Statements for a Merchandising Business?


Responsibility Statements

Financial statements reporting revenue, costs, and directexpenses under a specific department’s control

Departmental Margin Statements Include information about operating revenue, cost of merchandise

sold, and the direct expenses associated with the respective department

Format is similar to income statement – difference is no indirectexpenses are included

Help department managers determine how revenue, costs, and direct expenses affect departmental results

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LESSON 4-4


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LESSON 4-4

1. Determine net sales for department.

2. Determine cost of merchandise sold for department.

3. Calculate gross profit.

4. Record direct expenses of the department.

5. Calculate the departmental margin.

DEPARTMENTAL MARGIN STATEMENT—AUDIO page 111

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COMPONENT PERCENTAGES ON DEPARTMENTAL MARGIN STATEMENTS

Helps management interpret information Managers research causes for changes in percentages

Decisions are made based on these findings

Departments typically have % goals

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LESSON 4-4

Net SalesDepartmental Margin

Component Percentage for Departmental Margin÷ =

$49,222.61 ÷ = 14.3%$344,476.46

Component Percentages20X3 20X2 20X1

Departmental Margin 14.3% 13.4% 13.1%

page 112


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LESSON 4-4

DEPARTMENTAL MARGIN STATEMENT—VIDEO page 113

1. Determine net sales for department.

2. Determine cost of merchandise sold for department.

3. Calculate gross profit.

4. Record direct expenses of the department.

5. Calculate the departmental margin.

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Income Statement

Financial statement showing revenue and expenses for a fiscal period Includes revenue, gross profit, expenses, and net income/loss Summary information for each department is included Component percentages are included

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LESSON 4-4


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LESSON 4-4

INCOME STATEMENT WITH DEPARTMENTAL MARGIN

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1. Prepare the heading.

2-6. Use information from the departmental margin statements.

7. Use information from the Income Statement columns of the work sheet.

8. Complete the income statement.

9. Calculate component percentages.

page 114

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STATEMENT OF STOCKHOLDERS’ EQUITY

Financial statement that shows changes in a corporation’s ownership for a fiscal period1. Capital stock – total shares of ownership in a corporation2. Retained earnings – an amount earned by a corporation and not yet

distributed to stockholders3. Dividends – earnings distributed to stockholders

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LESSON 4-4

page 115


Balance Sheet

Financial statement that reports assets, liabilities, and owner’s equity on a specific date Snapshot showing what a business owns, owes, and is worth on a

given day Information comes from balance sheet columns of worksheet and

statement of stockholder’s equity Represents the accounting equation (A = L + OE)

Plant assets vs. Current assets Classified based on length of time assets will be in use

Current assets – assets expected to be exchanged for cashor consumed within a year

Plant assets - assets that will be used for a number of yearsin the operation of the business

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LESSON 4-4


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LESSON 4-4

BALANCE SHEET page 116


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LESSON 4-4

BALANCE SHEET page 116


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LESSON 4-4

TERMS REVIEW

responsibility statements income statement statement of stockholders’ equity capital stock retained earnings dividends balance sheet

page 117


LESSON 4-5

End-of-Period Work for a Departmentalized Business


Adjusting Entries

Journal entries recorded to update general ledger accountsat the end of a fiscal period

Use information from the Adjustments column of the worksheet; letters provide the order for the entries


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LESSON 4-5

2. Enter the adjusting entries without additional explanation.

JOURNALIZING ADJUSTING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 118

1. Write Adjusting Entries in the Account Title column.

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Closing Entries

Journal entries used to prepare temporary accounts for a new fiscal period

Information is obtained from the Departmental MarginStatements and the Income Statement columns of the work sheet

Four closing entries1. I/S accounts with credit balances (revenue and contra cost accts.)2. I/S accts. with debit balances (cost, expense, and contra revenue

accts.)3. Record net income or net loss in the retained earnings account and

to close Income Summary account4. Dividends account

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LESSON 4-5


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LESSON 4-5

JOURNALIZING CLOSING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 119

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1. Write Closing Entries in Account Title column.2. Record entry to close income statement accounts with

credit balances.3. Write (continued on general journal page 15) to show

that the closing entries are continued.

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A journal entry should not be split between two pages.


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LESSON 4-5

JOURNALIZING CLOSING ENTRIES FOR A DEPARTMENTALIZED BUSINESS page 120

4. Write Closing Entries (continued)in the Account Title column.

5. Record entry to close income statement accounts with debit balances.

6. Record entry to close Income Summary to Retained Earnings.

7. Record entry for Dividends.

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LESSON 4-5

POST-CLOSING TRIAL BALANCE FOR A DEPARTMENTALIZED BUSINESS page 122

Post-closing trial balance –prepared after the closingentries are posted to ensure that debits equal credits in the general ledger accounts


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LESSON 4-5

2. Record entries in journals.

SUMMARY OF ACCOUNTING CYCLE page 123

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93. Post journal entries to the ledgers.

9. Prepare a post-closing trial balance.

8. Journalize and post adjusting and closing entries.

7. Prepare financial statements.

6. Prepare a trial balance on the work sheet.

5. Prepare schedules of accounts receivable and accounts payable from the subsidiary ledgers.

4. Prepare interim departmental statement of gross profit.

1. Verify source documents for accuracy.


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LESSON 4-5

TERMS REVIEW

adjusting entries closing entries post-closing trial balance accounting cycle

page 117

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