Accounting for Merchandise Operations

1
Chapter 5
Accounting for Merchandise Operations
Electronic Presentation by Douglas Cloud
Pepperdine University
2
Learning Goals
1. Distinguish the operating activities of a
service business from those of a merchandising
business. 2. Describe and illustrate the
financial statements of a merchandising
business. 3. Describe the accounting for the sale
of merchandise. 4. Describe the accounting for
the purchase of merchandise.
After studying this chapter, you should be able
to
Continued
3
Learning Goals
5. Describe the accounting for transportation
costs and sales taxes. 6. Illustrate the dual
nature of merchandising transactions. 7. Describe
the accounting for merchandise shrinkage. 8. Descr
ibe and illustrate the effects of inventory
misstatements on the financial statements.
Continued
4
Learning Goals
9. Describe and illustrate the use of gross
profit and operating income in analyzing a
companys operations.
5
Learning Goal
1
Distinguish the operating activities of a service
business from those of a merchandising business.
6
In prior chapters, you were introduced to how to
report the financial condition and changes in
financial condition for a service business.
7
In this chapter, you will be exposed to the
accounting for merchandise operations.
8
Home Depot Inc. Condensed Income Statement For
the Year Ending December 28, 2001 (in
millions) Net sales 45,738 Cost of merchandise
sold 32,057 Gross profit 13,681 Operating
expenses 9,490 Operating income
4,191 Other income 26 Income before
taxes 4,217 Income taxes 1,636 Net
income 2,581
Net sales is the revenue received from selling
merchandise less any merchandise returned or any
discounts reported.
The revenue account for merchandise is Sales.
The cost of merchandise sold is matched against
net sales.
Revenue minus cost provides gross profit.
Whats different on a merchandising income
statement?
9
Learning Goal
2
Describe and illustrate the financial statements
of a merchandising business.
10
Multiple-Step Income Statement
Online Solutions Income Statement For the Year
Ended December 31, 2007
Net sales 708,255 Cost of merchandise sold
525,305 Gross profit 182,950 Operating expenses
105,710 Operating income 77,240 Other income
and expense (net) (1,840) Operating income
before taxes 75,400 Income taxes
15,000 Net income 60,400
11
Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales is the total amount the customers are
charged for merchandise sold, including cash
sales and sales on account.
Detailed Revenue Section
12
Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales returns and allowances are granted by the
seller for damaged or defective merchandise.
13
Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
14
Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
Purchases is the full cost of buying merchandise
for resale.
Detailed Cost of Merchandise Purchased Section
15
Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
A Purchase return is the cost of the merchandise
returned to the seller.
A Purchase allowance is a reduction in purchase
price because the item has a defect or was the
wrong item ordered.
16
Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
A Purchase discount is a reduction in the
initial cost of the merchandise. Usually, it is
due to early payment of the debt.
17
Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
Transportation-in is the shipping cost paid by
the buyer for merchandise. Note that this
freight payment increases the cost of the
merchandise. It is not an expense.
18
Multiple-Step Income Statement
Cost of merchandise purchased is a major
portion of the cost of merchandise sold section,
which follows the revenue section.
19
Multiple-Step Income Statement
Note on the next slide that the only change is
that the section begins by adding the beginning
inventory and ends by subtracting the ending
inventory.
20
Multiple-Step Income Statement
Merchandise inventory, Jan. 1, 2007
59,700 Purchases 521,980 Less Pur. returns
and allow. 9,100 Purchases discounts 2,525
11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755 Merchandise
available for sale 587,455 Less merchandise
inventory, Dec. 31, 2007 62,150 Cost of
merchandise sold 525,305
Detailed Cost of Merchandise Sold Section
21
Multiple-Step Income Statement
This income statement was prepared using the
periodic inventory method. The number of units
on hand was determined by a physical count.
22
Multiple-Step Income Statement
In contrast, a perpetual inventory system keeps a
running amount for each item as it is bought and
sold. A physical count is still necessary for
verification purposes.
23
Single-Step Income Statement
Online Solutions Income Statement For the Year
Ended December 31, 2007
Revenue Net sales 708,255 Expenses Cost of
merchandise sold 525,305 Operating expenses
105,710 Income taxes 15,000 Other income
and expense (net) 1,840 647,855 Net
income 60,400
24
Retained Earnings Statement
Online Solutions Retained Earnings Statement For
the Year Ended December 31, 2007
Retained earnings, January 1, 2007 128,800 Net
income for the year 60,400 Less dividends
18,000 Increase in retained earnings
42,400 Retained earning, December 31,
2007 171,200
25
Balance Sheet
Online Solutions Balance Sheet December 31, 2007
Assets Current assets Cash
52,950 Accounts receivable 76,080 Merchandise
inventory 62,150 Office supplies 480 Prepaid
insurance 2,650 Total current
assets 194,310
Continued
26
Property, plant, and equipment Land
20,000 Store equipment 27,100 less
accumulated depr. 5,700 21,400 Office
equipment 15,570 less accumulated depr.
4,720 10,850 Total property, plant, and
equip. 52,250 Total assets 246,560 Liabil
ities Current liabilities Accounts payable
22,420 Note payable 5,000 Salaries
payable 1,140 Unearned rent 1,800
Total current liabilities 30,360
Continued
27
Long-term liabilities Note payable (final
payment due 2017) 20,000 Total
liabilities 50,360 Stockholders
Equity Capital stock 25,000 Retained
earnings 171,200 196,200 Total liabilities
and stockholders equity 246,560
28
Statement of Cash Flows
Online Solutions Statement of Cash Flows For the
Year Ended December 31, 2007
Cash flows from operating activities Net
income 60,400 Add Depreciation
expensestore equipment 3,100 Depreciation
expenseoffice equipment 2,490 Decrease in
office supplies 120 Decrease in prepaid
insurance 350 Increase in accounts payable
8,150 14,210
Continued
29
Deduct Increase in accounts
receivable (24,080) Increase in merchandise
inventory (2,450) Decrease in salaries
payable (360) Decrease in unearned rent
(600) (27,400) Net cash flow form operating
activities 47,120 Cash flows from investing
activities Purchase of store equipment
(7,100) Purchase of office equipment
(5,570) Net cash flows used in investing
activities (12,670) Cash flows from financing
activities Payment of note payable
(5,000) Payment of dividends (18,000) Net
cash flows used in financing activities
(23,000) Net increase in cash 11,450 January 1,
2007 cash balance 41,500 December 31, 2007
cash balance 52,950
30
Learning Goal
3
Describe the accounting for the sale of
merchandise.
31
On January 3 Online Solutions sells merchandise
costing 1,200 for 1,800. The customer charges
the purchase on a MasterCard.
Transactions involving MasterCard or Visa are
treated as cash sales.
32
Jan. 3 Cash 1,800 Sales 1,800
This entry is made whether the company uses the
periodic or perpetual system.
An additional entry is made if the firm uses a
perpetual inventory system.
Jan. 3 Cost of Merchandise Sold 1,200 Merchandis
e Inventory 1,200
33
During January Online Solutions sold merchandise
costing 68,000 to American Express customers for
100,000. Online Solutions uses a perpetual
inventory.
Transactions involving American Express are
recorded as sales on account.
34
Jan. 31 Accounts Receivable American
Express 100,000 Sales 100,000
31 Cost of Merchandise Sold 68,000 Merch
andise Inventory 68,000
Online receives cash from American Express of
100,000, less a 4 service fee on February 15..
Feb. 15 Cash 96,000 Credit Card
Expense 4,000 Accounts Receivable American
Express 100,000
35
Sales Discounts
Credit Terms
2/10, n/30
36
Sales Discounts
On January 12 Online Solutions sells merchandise
costing 850 on account to Omega Tech for 1,500.
Credit terms are 2/10, n/30. Payment is
received on January 22.
Jan. 12 Accounts Receivable Omega
Tech 1,500 Sales 1,500
12 Cost of Merchandise Sold 850 Merchand
ise Inventory 850
37
Sales Discounts
On January 12 Online Solutions sells merchandise
costing 850 on account to Omega Tech for 1,500.
Credit terms are 2/10, n/30. Payment is
received on January 22.
Contra (offsetting) account to Sales
Jan. 22 Cash 1,470 Sales Discounts 30 Accounts
Receivable Omega Tech. 1,500
38
Sales Returns and Allowances
On January 13 Online Solutions issues a 2,000
credit memorandum to Krier Company for
merchandise that was returned. The merchandise
(cost 1,200) was sold on account.
Contra (offsetting) account to Sales
Jan. 13 Sales Returns and Allowances 2,000 Accou
nts Receivable Krier Company 2,000
13 Merchandise Inventory 1,200 Cost of
Merchandise Sold 1,200
39
Learning Goal
4
Describe the accounting for the purchase of
merchandise.
40
On January 3 Online Solutions purchased 2,500 of
merchandise for cash. Recall that Online
Solutions uses the perpetual system.
Jan. 3 Merchandise Inventory 2,500 Cash 2,500
If this transaction had been on account from Max
Corporation (terms 1/15, n/30), the entry would
have been
Jan. 3 Merchandise Inventory 2,500 Accounts
PayableMax Corporation 2,500
41
Purchase Discounts
On January 17 Online Solutions pays Max
Corporation the invoice amount less the discount.
The asset account is reduced.
Jan. 17 Accounts PayableMax Corp. 2,500 Merchan
dise Inventory 25 Cash 2475
Instead, assume the payment is made on Feb. 1 .
Feb. 1 Accounts PayableMax Corp. 2,500 Cash 2
,500
42
Purchases Returns and Allowances
On January 22 Online Solutions returns 5,000 of
merchandise purchased from Quantum Inc.
Jan. 22 Accounts PayableQuantum
Inc. 5,000 Merchandise Inventory 5,000
If the above return represents only part of the
total purchase and credit terms are 2/10, n/45,
the discount, if taken on the balance of the
order, only applies to the merchandise kept.
43
Learning Goal
5
Describe the accounting for transportation costs
and sales taxes.
44
Transportation Costs
45
(No Transcript)
46
Transportation Costs
On January 19 Online Solutions buys merchandise
from Data Max on Account, 2,900, terms FOB
shipping point, and prepays the transportation
cost of 150.
Jan. 19 Merchandise Inventory 2,900 Accounts
PayableData Max 2,900
19 Merchandise Inventory 150 Cash 150
47
Transportation Costs
On January 24 Online Solutions sells merchandise
to Miller Company on account, 4,700, terms FOB
destination. The cost of the merchandise sold is
2,750, and Online Solutions pays the
transportation cost of 350.
Jan. 24 Accounts ReceivableMiller
Co. 4,700 Sales 4,700
24 Cost of Merchandise Sold 2,750 Merchan
dise Inventory 2,750
48
Transportation Costs
On January 24 Online Solutions sells merchandise
to Miller Company on account, 4,700, terms FOB
destination. The cost of the merchandise sold is
2,750, and Online Solutions pays the
transportation cost of 350.
Jan. 24 Transportation Out 350 Cash 350
An expense
49
Transportation Costs
On January 14 Online Solutions sells merchandise
to Golden Company on account, 8,000, terms 2/10,
n/30, FOB shipping point. The cost of the
merchandise sold is 4,800, and Online pays the
transportation cost of 500.
Jan. 14 Accounts ReceivableGolden
Co. 8,000 Sales 8,000
14 Cost of Merchandise Sold 4,800 Merchan
dise Inventory 4,800
50
Transportation Costs
On January 14 Online Solutions sells merchandise
to Golden Company on account, 8,000, terms 2/10,
n/30, FOB shipping point. The cost of the
merchandise sold is 4,800, and Online pays the
transportation cost of 500.
Jan. 14 Accounts ReceivableGolden
Co. 500 Cash 500
Online prepaid the transportation cost although
it is Goldens responsibility. This debit sets
up the reimbursement.
51
Sales Taxes
On March 19 Toms Meat Market had cash sales
totaling 1,700. The local sales tax is 7,
which is collected on each sale. The entry to
record the days sales is as follows
Mar. 19 Cash 1,819 Sales 1,700 Sales Taxes
Payable 119
52
Learning Goal
6
Illustrate the dual nature of merchandising
transactions.
53
July 1. Scully Company sold merchandise on
account to Burton Co., 7,500, terms FOB shipping
point, n/45. The cost of the merchandise sold
was 4,500
Scully Co. (Seller)
Accounts ReceivableBurton Co. 7,500 Sales 7,500
Cost of Merchandise Sold 4,500 Merchandise
Inventory 4,500
54
July 1. Scully Company sold merchandise on
account to Burton Co., 7,500, terms FOB shipping
point, n/45. The cost of the merchandise sold
was 4,500
Burton Co. (Buyer)
Merchandise Inventory 7,500 Accounts
PayableScully Co. 7,500
55
July 2. Burton Co. paid transportation charges
of 150 on July 1 purchase of Scully Company.
Scully Co. (Seller)
No entry.
Burton Co. (Buyer)
Merchandise Inventory 150 Cash 150
56
July 5. Scully Company sold merchandise on
account to Burton Co., 5,000, terms FOB
destination, n/45. The cost of the merchandise
sold was 3,500
Scully Co. (Seller)
Accounts ReceivableBurton Co. 5,000 Sales 5,000
Cost of Merchandise Sold 3,500 Merchandise
Inventory 3,500
57
July 5. Scully Company sold merchandise on
account to Burton Co., 5,000, terms FOB
destination, n/45. The cost of the merchandise
sold was 3,500
Burton Co. (Buyer)
Merchandise Inventory 5,000 Accounts
PayableScully Co. 5,000
58
July 7. Scully Co. paid transportation charges
of 250 for delivery of merchandise sold to
Burton Co. on July 5.
Scully Co. (Seller)
Transportation Out 250 Cash 250
Burton Co. (Buyer)
No entry
59
July 13. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
1,000. The merchandise had been purchased by
Burton Co. on account on July 5. The cost of the
merchandise returned was 700.
Scully Co. (Seller)
Sales Return and Allowances 1,000 Accounts
ReceivableBurton Co. 1,000
Merchandise Inventory 700 Cost of Merchandise
Sold 700
60
July 13. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
1,000. The merchandise had been purchased by
Burton Co. on account on July 5. The cost of the
merchandise returned was 700.
Burton Co. (Buyer)
Accounts PayableScully Co. 1,000 Merchandise
Inventory 1,000
61
July 15. Scully Company received payment from
Burton Co. for purchase of July 5.
Scully Co. (Seller)
Cash 4,000 Accounts ReceivableBurton Co. 4,000
Burton Co. (Buyer)
Accounts PayableScully Co. 4,000 Cash 4,000
62
July 18. Scully Co. sold merchandise on account
to Burton Co., 12,000, terms FOB shipping point,
2/10, n/eom. Scully Co. prepaid transportation
costs of 500, which were added to the invoice.
The cost of the merchandise sold was 7,200.
The full amount is due by the end of the month.
Scully Co. (Seller)
Accounts ReceivableBurton Co. 12,000 Sales 12,0
00
Accounts ReceivableBurton Co. 500 Cash 500
63
Cost of Merchandise Sold 7,200 Merchandise
Inventory 7,200
64
July 18. Scully Co. sold merchandise on account
to Burton Co., 12,000, terms FOB shipping point,
2/10, n/eom. Scully Co. prepaid transportation
costs of 500, which were added to the invoice.
The cost of the merchandise sold was 7,200.
Burton Co. (Buyer)
Merchandise Inventory 12,500 Accounts
PayableScully Co. 12,500
65
July 28. Scully Company received payment from
Burton Company for purchase of July 18, less
discount (2 x 12,000).
Scully Co. (Seller)
Cash 12,260 Sales Discount 240 Accounts
ReceivableBurton Co. 12,500
Burton Co. (Buyer)
Accounts PayableScully Co. 12,500 Merchandise
Inventory 240 Cash 12,260
66
Learning Goal
7
Describe the accounting for merchandise shrinkage.
67
When a company uses a perpetual inventory, a
physical count is taken at the end of the
accounting period to determine the accuracy of
the perpetual records and to record any inventory
shrinkage.
68
Online Solutions inventory records indicate that
63,950 of merchandise should be available for
sale on December 31, 2007. The physical
inventory taken on that date indicates that only
62,150 of merchandise is available for sale.
Inventory shrinkage is 1,800
Cost of Merchandise Sold 1,800 Merchandise
Inventory 1,800
69
Learning Goal
8
Describe and illustrate the effects of inventory
misstatements on the financial statements.
70
Effects of Inventory Misstatements
Income Statement Effects
Physical Inventory Misstatement
Inventory Shrinkage Misstated
Cost of Merchandise Sold Misstated
Gross Profit Misstated
Net Income Misstated
Balance Sheet Effects
Net Income Misstated
Retained Earnings Misstated
Physical Inventory Misstatement
Adjusted Mer. Inv. Misstated
Current Assets Misstated
Total Assets Misstated
71
On December 31, 2007, Sapra Company incorrectly
counted its physical inventory as 115,000
instead of 125,000.
Amount of Misstatement Overstated (Understated)
2007 Financial Statements
72
On December 31, 2007, Sapra Company incorrectly
counted its physical inventory as 115,000
instead of 125,000.
Amount of Misstatement Overstated (Understated)
2008 Financial Statements
73
Learning Goal
9
Describe and illustrate the use of gross profit
and operating income in analyzing a companys
operations.
74
Gross profit and operating income are two
important profitability measures analyst use in
assessing
the efficiency and effectiveness of a
merchandisers operations.
75
Gross Profit Percent
Net sales 32,004 Cost of merchandise sold
22,789 Gross profit 9,215 Operating expenses
8,459 Operating income 756
9,2l5
28.8
32,004
76
Gross Profit Percent
J. C. Pennys gross profit percentage went from
28.8 to 27.7, then recovered back to 29.8.
77
Gross Profit Percent
The recovery in the third year was attributed to
better merchandise assortment, improved inventory
productivity, and centralized buying.
78
Operating Income Percent
Net sales 32,004 Cost of merchandise sold
22,789 Gross profit 9,215 Operating expenses
8,459 Operating income 756
756
2.4
32,004
79
Operating Income Percent
The companys operating income percentage dropped
from 2.4 to 0.6, then recovered back to 2.7.
80
Operating Income Percent
This recovery was attributed to lower catalog and
marketing costs, lower telemarketing costs, and a
shift from development to maintenance of
JCPenny.com.
81
Chapter 5
The End
82
(No Transcript)