Merchandising Operations

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Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

Chapter 5


Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

• Buying and selling products


Objective 1Objective 1Objective 1Objective 1

Account for the purchase of inventory


Cash

Inventory

AccountsReceivable

PurchaseSe

ll

Collect

Operating Cycle of a Operating Cycle of a Merchandising BusinessMerchandising Business

Operating Cycle of a Operating Cycle of a Merchandising BusinessMerchandising Business


Inventory SystemsInventory SystemsInventory SystemsInventory Systems

• Periodic

• Perpetual


GENERAL JOURNAL

DATE DESCRIPTION REF DEBIT CREDIT

Purchase of Inventory Purchase of Inventory S5-1S5-1

Inventory 10,000

Accounts Payable 10,000

Purchased inventory


Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

• A deduction from the invoice price granted to encourage early payment of the amount due– 2/10, n/30– n/30– eom

Credit terms 2/10, n/30 means 2% discount if paid within 10 days. If the discount period is missed, the full amount is due within 30 days.

This decreases the cost of the inventory.


GENERAL JOURNALDATE DESCRIPTION REF DEBIT CREDIT

Purchase of Inventory Purchase of Inventory S5-2S5-2


Cash 9,800

Inventory 200

Paid within discount period

10,000

Inventory

200

Bal 9,800

Discount = $10,000 x 2% = $200


Purchase Returns and Purchase Returns and AllowancesAllowances

Purchase Returns and Purchase Returns and AllowancesAllowances

• 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


GENERAL JOURNAL


Purchase Returns and Purchase Returns and Allowances – S5-2Allowances – S5-2

Inventory 100,000


Purchased inventory





Inventory 10,000

Returned damaged goods

100,000

Inventory

10,000

Bal 90,000

100,000

Accounts Payable

10,000

Bal 90,000





Cash 90,000

Paid after the discount period

100,000

Inventory

10,000

Bal 90,000

100,000

Accounts Payable

10,000

Bal 0

90,000

Part a. If this is paid after the discount period, the company must pay the full invoice price less the return





Cash 87,300

Inventory 2,700


100,000

Inventory

10,000

Bal 87,300

2,700 100,000

Accounts Payable

10,000

Bal 0

90,000

Part b: If paid within the discount period. Discount = $90,000 x 3% = $2,700


Transportation CostsTransportation Costs

FOB Shipping Point(Buyer Pays)

FOB Destination(Seller Pays)

Seller

Goods

Buyer


Transportation CostsTransportation CostsTransportation CostsTransportation Costs

• Freight in– Transportation cost on purchased goods– Debit inventory

• Freight-out– Transportation cost on goods sold– Debit an expense (delivery expense)


GENERAL JOURNAL


E5-15E5-15

Apr 30 Inventory 6,000


Purchased inventory


GENERAL JOURNAL


E5-15E5-15

Apr 30 Inventory 300

Cash 300

Paid freight charges

6,000

Inventory

300

Bal 6,300

6,000

Accounts Payable



E5-15E5-15

Apr 30 Accounts Payable 1,000

Inventory 1,000

Returned unsuitable goods

6,000

Accounts Payable

1,000

Bal 5,000

6,000

Inventory

300

Bal 5,300

1,000



E5-15E5-15

May14 Accounts Payable 5,000

Cash 4,850

Inventory 150


6,000

Accounts Payable

1,000

Bal 0

5,000 6,000

Inventory

300

Bal 5,150

1,000 150

Discount = $5,000 x 3% = $150Remember, do not compute the discount on the freight charges….only the invoice price



Account for the sale of inventory


Sale of InventorySale of InventorySale of InventorySale of Inventory

• Sales Revenue– Amount earned from selling inventory– Revenue account

• Cost of Goods Sold– Cost of inventory that has been sold to

customers– Expense account


Sale of InventorySale of InventorySale of InventorySale of Inventory

• Sales Returns & Allowances – When customer returns goods or the seller

grants a reduction in price to customer– Contra-revenue account (debit balance)

• Sales Discounts– If customer pays within the discount period

allowed by the seller– Contra-revenue account (debit balance)

• Delivery Expense (Freight Out)


Sales TransactionsSales TransactionsS5-5S5-5



Accounts Receivable 60,000

Sales Revenue 60,000

To record sales on account

Cost of Goods Sold 32,000

Inventory 32,000

To record cost of sales

Remember, there are always two entries to record a sale when using

the perpetual inventory system. One to record the selling price to the customer and the second to remove the inventory from your

books at the amount your company paid to acquire it





Cash 60,000


Collected on account

What if there were no credit terms allowed?





Cash 58,800

Sales Discount 1,200






Sales $60,000

Sales Discount (1,200)

Net Sales $58,800


S5-6S5-6S5-6S5-6



Sales Revenue 10,000

To record sales on account


Inventory 6,000

To record cost of sales


S5-6S5-6S5-6S5-6


Sales Returns & Allowances 1,000Accounts Receivable 1,000

To record 100 books returned

Inventory 600

Cost of Goods Sold 600Returned books to inventory

When merchandise is returned, you also have two entries


S5-6S5-6S5-6S5-6

Sales Discounts

1,000

Sales Returns & Allowances

Bal 1,000

Sales

10,000 10,000

Accounts Receivable

Bal 9,000

1,000


S5-6S5-6S5-6S5-6


Cash 8,820

Sales Discount 180




S5-6S5-6S5-6S5-6

Sales Discounts

1,000

Sales Returns & Allowances

Bal 1,000

Sales

10,000 10,000

Accounts Receivable

Bal 0

1,000

180Bal 180

9,000

6,000

Cost of Goods Sold

Bal 5,400

600


S5-7S5-7S5-7S5-7

Sales $10,000

Sales Returns & Allowances (1,000)

Sales Discounts (180)

Net Sales $8,820

Cost of Goods Sold (5,400)

Gross Profit $3,420



Adjust and close the accounts of a merchandising business


Adjusting InventoryAdjusting InventoryAdjusting InventoryAdjusting Inventory

• If physical count of inventory is different from amount on the books – Inventory Shrinkage

• Debit Cost of Goods Sold

• Credit Inventory


S5-8S5-8S5-8S5-8



Inventory 1,100

Adjustment for shrinkage

$65,000 (per books) - 63,900 (physical count) $1,100 (shrinkage)


Closing EntriesClosing EntriesClosing EntriesClosing Entries

1. Close all income statement accounts with credit balances to Income Summary

2. Close all income statement accounts with debit balances to Income Summary

3. Close Income Summary to Capital

4. Close Withdrawals to Capital


S5-9S5-9S5-9S5-9GENERAL JOURNAL


Dec 31 Sales Revenue 700,000

Income Summary 700,000

31 Income Summary 424,000


Rent Expense 20,000Depreciation Expense 10,000

Sales Discounts 9,000


S5-9S5-9S5-9S5-9GENERAL JOURNAL


Dec 31 Income Summary 276,000

J. Hayes, Capital 276,000

(700,000 – 424,000)

31 J. Hayes, Capital 60,000

J. Hayes, Withdrawals 60,000



Prepare a merchandiser’s financial statements


Income StatementIncome StatementIncome StatementIncome Statement

Net sales - Cost of goods sold

Gross profit - Operating expenses:

Selling expenses – related to selling and marketing the inventory

General expense – office expensesOperating income

+ Other revenue and expenseNet income


Income Statement FormatsIncome Statement FormatsIncome Statement FormatsIncome Statement Formats

• Multiple-Step – see previous slide– Contains key subtotals

• Single-Step– Total revenues minus total expenses


S5-10S5-10S5-10S5-10Carolina Communications

Income StatementFor the Year Ended January 31, 2009

Net Sales Revenue $25,000


Gross Profit $5,000

Operating Expenses 3,500

Net Income $1,500

Multiple step has key subtotal, gross profit


S5-10S5-10S5-10S5-10Carolina Communications

Income StatementFor the Year Ended January 31, 2009

Net Sales Revenue $25,000

Cost of Goods Sold $20,000

Operating Expenses 3,500 23,500

Net Income $1,500

Single step combines all expenses



Use gross profit percentage and inventory turnover to evaluate a

business


Gross Profit PercentageGross Profit Percentage

Percentage of dollar sales available to cover expenses and provide a profit

Gross Profit Net Sales


Rate of Inventory TurnoverRate of Inventory TurnoverRate of Inventory TurnoverRate of Inventory Turnover

Cost of goods sold

Average inventory

Average inventory =

(Beg inventory + End inventory) / 2

How rapidly is inventory sold?


E5-25E5-25E5-25E5-25

Net sales $65Cost of sales (33)Gross profit $32

Gross profit percentage:

Gross Profit

Net Sales

= $32

$65

= 49%


E5-25E5-25E5-25E5-25

Inventory Turnover:

= $33 $(4 + 3)/2

= 9.4 timesCost of goods soldAverage inventory



Compute cost of goods sold in a periodic inventory system


Cost of Goods Sold – Periodic Cost of Goods Sold – Periodic Inventory SystemInventory System


Beginning Inventory

+ Purchases

Goods Available for Sale





- Ending Inventory

Cost of Goods Sold




Beginning Inventory

+ Purchases


- Ending Inventory

Cost of Goods Sold


E5-26E5-26E5-26E5-26

a. Sales $170,000

Sales discounts (3,000)

Sales returns (15,000)

Net sales $152,000


E5-26E5-26E5-26E5-26

b. Inventory, May 31, 20X6 $19,000

Purchases $82,000

Purchases discounts (2,000)

Purchases returns (8,000)

Freight in 4,000

Net purchases 76,000

Goods available for sale $95,000

Inventory, May 31, 20X7 (21,000)

Cost of goods sold $74,000


E5-26E5-26E5-26E5-26

c. Net sales

$152,000

Cost of goods sold

(74,000)

Gross profit

$78,000


End of Chapter 5End of Chapter 5End of Chapter 5End of Chapter 5

Merchandising Operations

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