Merchandising Transactions

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MERCHANDISING

TRANSACTIONS

CHAPTER 6CHAPTER 6

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Service Organizations vs. Service Organizations vs. Merchandising CompaniesMerchandising Companies

Service organizations sell timetime to earn revenue Examples include accounting firms, law

firms, and plumbing services These have been our emphasis up to now

Service CompanyIncome Statement

For the Year Ended December 31, 1999

Service revenues 150,000$ Expenses 137,500 Net income 12,500$

Not a plumber!

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Service Organizations vs. Service Organizations vs. Merchandising CompaniesMerchandising Companies

Merchandising companies sell productsproducts to earn revenue Examples include sporting goods, clothing,

and auto parts stores These will be our emphasis for the rest of

the semesterMerchandising Company

Income StatementFor the Year Ended December 31, 1999

Sales revenues 150,000$ Cost of goods sold 80,000 Gross margin 70,000 Expenses 46,500 Net income 23,500$

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Seller Customer/Buyer

Transfers Products

Cashor

Promise to Pay

Merchandising CompaniesMerchandising Companies

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Inventory Products held for sale Classified as asset

Sales Exchange of merchandise for an asset Classified as revenue

Cost of Goods Sold (COGS) Cost of inventory sold during the period Classified as expense


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CLASSIFIED INCOME STATEMENT

a/k/a

MULTIPLE STEP INCOME STATEMENT

a/k/a

“SATURDAY NIGHT” PAGE

226


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ROLL ‘EM !ROLL ‘EM !

Video #1(Approx. 6 min.)

Video #2(Approx. 8 min.)

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Manufacturer Wholesaler RetailerFinal

Customer

““Channel of Distribution”Channel of Distribution”(5 points on next test)

210

Can manufacturer sell direct to final customer? (i.e., can green box be skipped?)

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Who cares?

Accounting TerminologyAccounting Terminology

Sales Invoice

vs.

Purchase InvoiceWhat’s the difference?

211

prepares?

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Recording and Reporting SalesRecording and Reporting Sales

Gross salesLess: Sales discountsLess: Sales returns and allowancesNet sales

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Recording Gross SalesRecording Gross Sales

On May 13, TCom sold $25,000 of merchandise for cash.

GENERAL JOURNAL Page 74Date Description PR Debit Credit

May 13 Cash 25,000

Sales 25,000

To record the sale of

merchandise for cashIf the sale had been on account, we woulddebit Accounts Receivable instead of Cash.

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Two Types of DiscountsTwo Types of Discounts Trade Discounts

A percentage deduction from the list or catalog price to arrive at the gross selling (invoice) price

Know the three reasons for using (p. 213) Not recorded on either seller’s or buyer’s Not recorded on either seller’s or buyer’s

books!!books!!ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least

1,000 of their most popularproduct known as Zippy. Each Zippy has a list price of $5.25.

ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least

1,000 of their most popularproduct known as Zippy. Each Zippy has a list price of $5.25.

Quantity sold 1,000 Price per unit 5.25$ Total 5,250 Less 30% discount (1,575) Invoice price 3,675$

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Two Types of DiscountsTwo Types of Discounts Cash Discounts

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

Two other names for cash discounts• Sales discounts• Purchase discounts

Recorded on whose books?• Both seller’s and buyer’s books

They are pervasive

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Two Types of DiscountsTwo Types of Discounts Cash Discounts

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

Two other names for cash discounts• Sales discounts• Purchase discounts

Recorded on whose books?• Both seller’s and buyer’s books

They are pervasive

3/15,n/303/15,n/30Number of

Days Discount is Available

Number of Days

Discount is Available

Otherwise, Net (or All)

is Due

Otherwise, Net (or All)

is Due

In This Number of

Days

In This Number of

Days

Discount Percent

Discount Percent

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Cash (Sales) Discount ExampleCash (Sales) Discount Example

On November 8, Borey Co. sold merchandise to West, Inc. for $6,000 on

account; credit terms 2/10, n/30.

General Journal Page 61

Date Description PR Debit Credit

Nov. 8 Accounts Receivable 6,000

Sales 6,000

To record the sale on account

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Cash (Sales) Discount ExampleCash (Sales) Discount Example

On November 14, West, Inc. paid its account in full.

General Journal Page 68Date Description PR Debit Credit

Nov. 14 Cash 5,880

Sales Discount 120

Accounts Receivable 6,000

To record cash received on account

Discount = $6,000 × 2% = $120Discount = $6,000 × 2% = $120

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Other Deductions from SalesOther Deductions from Sales

Sales ReturnMerchandise returned by the buyer as unsatisfactory or defective.

Sales AllowanceA deduction from the original invoice price when the customer keeps merchandise but is dissatisfied with it.

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Sales Returns and AllowancesSales Returns and AllowancesExampleExample

Before making a payment to you, a customer returns $135 of goods sold on account.


Sales Returns and Allowances 135

Accounts Receivable 135

To record return of defective item.

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Partial Income StatementPartial Income Statement

Gross salesLess: Sales discountsLess: Sales returns and allowances

Net sales

Sales discounts and Salesreturns and allowances areContra Revenue accounts.

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Inventory MethodsInventory Methods

Perpetual Method

Periodic Method

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Perpetual MethodPerpetual Method

The inventory account is continuously up-dated as purchases and sales of

inventory occur.

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Perpetual MethodPerpetual Method

The inventory account is continuously up-dated as purchases and sales of

inventory occur.

More on this method in Chapter 7.

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Periodic MethodPeriodic Method

This is the method used in this chapter.

Entries are not made to the inventory account during the year.

At the end of the accounting period, a physical count of inventory is needed to update the inventory account and

calculate cost of goods sold.

What is the mechanism for updating the inventory account?

Closing entries

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Closing Entries for Closing Entries for Merchandising CompanyMerchandising Company



Sales

Purchase Discounts

Purchase Returns and Allowances

Merchandising Inventory (ending)

Income Summary

To close accounts with credit balances and set

up proper balance in ending inventory account.

Dec. 31 XXX

XXX

XXX

XXX

XXX

Closing Entry #1 232 233

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Closing Entries for Closing Entries for Merchandising CompanyMerchandising Company



Other accounts including all expenses

Sales Discounts

Sales Returns and Allowances

Merchandising Inventory (beginning)

Income Summary

To close accounts with debit balances includingthe beginning inventory account.

Dec. 31 XXX

XXX

XXX

XXX

XXX

Closing Entry #2

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Cost of Goods SoldCost of Goods Sold

...is an expense representing the cost of the inventory sold during the period.

...appears on the income statement.

...must be calculated using a multiple-step process when using the periodic method.

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Beginning Inventory

+ Purchases

- Purchase Discounts

- Purchase Returns and Allowances

+ Transportation-in

= Cost of Goods Available for Sale

- Ending Inventory

= Cost of Goods Sold

Calculation ofCalculation ofCost of Goods SoldCost of Goods Sold

Multiple-Step ProcessMultiple-Step Process

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Cost of goods sold:

Merchandise inventory, January 1, 1999 24,000$ Purchases: 167,000$ Less: Purchase discounts 3,000$ Purchase returns and allowances 8,000 11,000 Net purchases 156,000 Add: Transportation-in 10,000 Net cost of purchases 166,000 Cost of goods available for sale 190,000 Less: Merchandise inventory, December 31, 1999 31,000 Cost of goods sold 159,000$

Calculation ofCalculation ofCost of Goods SoldCost of Goods Sold

Formal Income Statement PresentationFormal Income Statement Presentation

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Purchase of MerchandisePurchase of Merchandise

One May 7, Barbee, Inc. purchased $27,000 of merchandise on account; terms 2/10, n/30.



May 7 Purchases 27,000

Accounts Payable 27,000

Purchase merchandise on account

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One May 16, Barbee, Inc. paid for the purchase of May 7 in full.

$27,000 × 2% = $540 discount


May 16 Accounts Payable 27,000

Cash 26,460

Purchase Discounts 540

Payment on account

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May 16 Accounts Payable 27,000

Cash 26,460

Purchase Discounts 540

Payment on account

$27,000 × 2% = $540 discount


One May 16, Barbee, Inc. paid for the purchase of May 7 in full.

Purchase Discounts is a

Contra PurchasesContra Purchasesaccount.

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Purchase Returns and AllowancesPurchase Returns and Allowances

The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller.

On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before

payment is made to the supplier.

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Purchase Returns and AllowancesPurchase Returns and Allowances

The buyer returns, or accepts a reduction in invoice price of, merchandise to the seller.

On May 27, Barbee, Inc. returns $200 of defective merchandise purchased on account before

payment is made to the supplier.


Date Description PR Debit CreditMay 27 Accounts Payable 200

Purchase Returns and Allowances 200

Returned defective merchandise

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Transportation CostsTransportation Costs

Transportation-InInward freight costs of acquiring

merchandise.

Transportation-In ispart of cost of goods sold!

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Transportation Out/Delivery ExpenseOutgoing freight costs that must be paid by

the seller.

Delivery Expense is aselling expense on the

income statement!

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Free on Board (FOB) Shipping Point. FOB Destination. Freight Prepaid Freight Collect

Who pays thefreight charges?

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FOB PointsFOB Points

ABC Wholesalers

FOB what? (Pick one)FOB what? (Pick one)

Shipping PointShipping Point

DestinationDestination

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FOB Shipping Point “Free on board” at the shipping (selling) point Title passes to buyer upon shipment Buyer owns en route and...

• Ultimately bears the cost of the freight• Assumes risk of loss in transit

FOB Destination “Free on board” at the destination point Seller owns en route and...

• Ultimately bears the cost of the freight• Assumes risk of loss in transit

FOB PointsFOB Points

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Transportation Cost SummaryTransportation Cost Summary

TermsInitially

Pays

Ultimately Bears

Expense

FOB Shipping Point - Freight Collect Buyer BuyerFOB Destination - Freight Prepaid Seller SellerFOB Destination - Freight Collect Buyer Seller

FOB Shipping Point - Freight Prepaid Seller Buyer

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Transportation Cost SummaryTransportation Cost Summary

TermsInitially

Pays

Ultimately Bears

Expense

FOB Shipping Point - Freight Collect Buyer BuyerFOB Destination - Freight Prepaid Seller SellerFOB Destination - Freight Collect Buyer Seller

FOB Shipping Point - Freight Prepaid Seller Buyer

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Prepare the journal entries for Jackson Co. Use the periodic inventory method.

July 5, 1998 Purchased 1,000 units of inventory for $25,000 cash.

July 9, 1998 Sold 300 units of inventory to a customer on account for $35 per unit.


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July 5 Purchases 25,000

Cash 25,000

To record inventory purchasesAt Cost

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July 5 Purchases 25,000

Cash 25,000

To record inventory purchases

July 9 Accounts Receivable 10,500

Sales 10,500

To record inventory sales

300 units × $35 = $10,500

At Retail

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Saturday Night Page, AgainSaturday Night Page, AgainP. 226P. 226

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Classified Income Statement:Classified Income Statement:RevenueRevenue

Sales 250,000$ Less: Sales Discounts 3,000$ Sales Ret. & Allow. 1,500 4,500Net Sales 245,500$

Earned from the sale of inventory

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Alternative way to express income statement relationships?

(Hint: 8th Grade)

Net sales = Gross sales - (Sales disc.+ SR&A)

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Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold

Beginning Inventory (BI) 55,000$ “Purchases” (P) 176,500

Cost of Goods Avail. for Sale (GAS) 231,500Less: Ending Inventory (EI) 64,000Cost of Goods Sold (COGS) 167,500$

Three approaches to Cost of Goods Sold:

(1) Simplified Income Statement Approach

(2) Equation Approach

COGS = BI + P - EI

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Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold

Beginning Inventory 55,000$ Purchases 175,000$ Less: Purchase Discounts 6,000$

Purchase Ret. & Allow. 2,500 8,500Net Purchases 166,500$ Add: Transportation-in 10,000Net Cost of Purchases 176,500Cost of Goods Avail. for Sale 231,500$ Less: Ending Inventory 64,000Cost of Goods Sold 167,500$

(3) Formal Income Statement Approach

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Classified Income Statement:Classified Income Statement:Gross MarginGross Margin

Net Sales 245,500$ Cost of Goods Sold 167,500Gross Margin 78,000$

Gross Margin = Net Sales - COGS

Gross Margin is also called Gross ProfitGross Profit

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Classified Income Statement:Classified Income Statement:Types of Operating ExpensesTypes of Operating Expenses

Selling Expenses

Administrative Expenses

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Gross margin 78,000$ Operating expenses:

Selling expenses:Sales salaries 26,000$ Delivery expense 3,000 Advertising expense 2,000 Rent - store building 4,000 Depreciation - store equip. 2,500 37,500

Administrative expenses:Executive salaries 29,000 Rent - office building 1,600 Insurance expense 1,500 Supplies expense 1,100 33,200

Total operating expenses 70,700 Income from operations 7,300$

Classified Income Statement:Classified Income Statement:Income from OperationsIncome from Operations

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Classified Income Statement:Classified Income Statement:Types of Nonoperating ItemsTypes of Nonoperating Items

Nonoperating Revenues

Nonoperating Expenses

Income from operations 7,300$ Nonoperating revenues and expenses

Nonoperating revenues:Interest revenue 400 Rent Revenue 2,000

Nonoperating expenses:Interest expense (700) Safe deposit box rental 100

Net income 9,100$

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Work Sheet and Closing EntriesWork Sheet and Closing EntriesAppx. 231

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Gross Margin Gross Margin PercentagePercentage

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

GROSS MARGIN NET SALES

GM% =

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WE CAN LOOK FORWARD TO A CLOSER INSPECTION

OF INVENTORY IN CHAPTER 7!

THE ENDTHE END

Merchandising Transactions

Economy & Finance

Transcript of Merchandising Transactions