Merchandising Operations and the Accounting Cycle

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Merchandising Operationsand the Accounting Cycle

• Chapter 5

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Income Statements
Service Co. Income
Statement Year ended June 30, 20xx Service
revenue xxx Expenses Salary expense
x Depreciation expense x Income tax
expense x Net income xx
Merchandising Co. Income
Statement Year ended June 30, 20xx Sales
revenue xxx Cost of goods sold x Gross
profit xx Operating expenses Salary
expense x Depreciation expense
x Net income xx
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Objective 1

• Use sales and gross profit
• to evaluate a company.

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Sales Revenue
Net sales

Sales Revenue less Sales Returns and Sales
Discounts
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Gross Profit or Gross Margin
Target Corporation Income Statement
(Adapted) Year Ended December 31, 2000
Millions
Net sales revenue (same as Net sales) 33,212 C
ost of goods sold (same as Cost of sales)
23,029 Gross profit (same as Gross margin)
10,183 Expenses Selling, general,
administrative 7,490 Depreciation expense
854 Interest expense 393
Other expenses, net 302 Total operating
expenses 9,039 Net earnings (same as
Net income) 1,144
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Operating Cycle of a Merchandising Business
Purchase and Cash Sale
Purchase and Sale on Account
Cash
Cash
Collections o f Cash
Purchases
Purchases
Cash Sales
Inventory
Accounts Receivable
Sales on Account
Inventory
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Inventory Systems
Perpetual
Periodic
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Objective 2

• Account for the purchase
• and sale of inventory.

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Purchase of Inventory
Suppliers send merchandise and a bill
Merchant prepares purchase order
Compares
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Purchase of Inventory Example

• On May 1, the Sporting Store acquired on account
  2,000 of various items for resale.
• The supplier sent the merchandise along with a
  bill stating the quantity, price, and terms of
  sale.
• What is the journal entry?

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Purchase of Inventory Example

• May 1
• Inventory 2,000
  Accounts Payable 2,000
  Purchased inventory on account
• Inventory Accounts Payable 2,000
  2,000

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Recording Purchase Returnsand Allowances Example

• Assume that on May 4 a 100 item was returned
  prior to payment of the invoice.
• What is the journal entry?

May 4 Accounts Payable 100 Inventory
100 Merchandise was
returned
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Recording Purchase Returnsand Allowances Example

• Assume that one of the items of merchandise is
  slightly damaged, and the store was given a 10
  allowance.
• What is the journal entry?

May 4 Accounts Payable 10 Inventory
10 Received a purchase
allowance
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Recording Purchase Returnsand Allowances Example
Accounts Payable
Inventory
2,000 100 10
100 2,000 10
Bal. 1,890
Bal. 1,890
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Purchase Discounts

• Credit terms are stated in expressions such as
• 2/10, N/30, meaning that a discount of 2 is
  allowed if the invoice is paid within 10 days
  otherwise the full (net) amount is due within 30
  days.

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Purchase Discounts Example

• Assume the Sporting Store purchased merchandise
  for 1,000 with terms of 2/10, N/30.
• The store paid within the discount period.
• The 2 discount (20) is deducted from the amount
  due (1,000) and 980 is remitted.

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Purchase Discounts Example

• What is the journal entry?

Accounts Payable 1,000 Cash 980 Invent
ory 20 To record payment of invoice within
the discount period
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Recording Transportation Costs

• Transportation costs are the cost of moving
  inventory from seller to buyer.
• FOB stands for Free on Board and governs the
  passing of title of the goods.
• Selling/buying agreements usually specify FOB
  terms.

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Recording Transportation Costs
FOB Shipping Point
FOB Destination
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Freight Charges Example

• Assume that on May 9 the Sporting Store paid 60
  for freight.
• What is the journal entry?

May 9 Inventory 60 Cash
60 Paid a freight bill
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Sporting Store Example

• Assume that on May 11 the store sold merchandise
  costing 1,800 for 2,600 in cash.
• What are the journal entries?

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Sporting Store Example
May 11 Cash
2,600 Sales Revenue 2,600 To
record sale of merchandise
May 11 Cost of Goods Sold 1,800 Inventory
1,800 To record the cost of
merchandise sold
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Sporting Store Example

• On May 15, the store sold to Maria Gym 5,000
  worth of merchandise with a cost of 3,000.
• Terms are 2/10, N/30.

Invoice
Maria Gym Terms 2/10, N/30 Total 5,000
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Sales Discounts and Sales Returns and Allowances
Example

• On May 17, Maria Gym returned 1,500 worth of
  goods that cost 900.
• In addition, a credit of 100 was allowed for
  merchandise that was damaged.
• What are the journal entries?

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Sales Discounts and Sales Returns and Allowances
Example
May 17 Sales Returns and Allowance
1,500 Accounts Receivable 1,500 Received
returned merchandise
May 17 Inventory
900 Cost of Goods Sold 900 Returned
goods to inventory
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Sales Discounts and Sales Returns and Allowances
Example

• There is no entry required for inventory since
  the goods were not returned.

May 17 Sales Returns and Allowance 100 Accounts
Receivable 100 Credit granted for damaged
goods
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Sales Discounts and Sales Returns and Allowances
Example

• On May 20, the store received a check from Maria
  Gym for the balance due.
• What is the balance due?

Accounts Receivable May 15 5,000
Less May 17 returns and allowances 1,600
Equals May 20 balance due of 3,400
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Sales Discounts and Sales Returns and Allowances
Example

• Maria took advantage of the sales terms 2/10,
  N/30.

May 20 Cash
3,332 Sales Discounts
68 Accounts Receivable 3,400 Cash
collected within the discount period
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Objective 3

• Adjust and close the accounts of a merchandising
  business.

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Adjustments to Inventory Example
Book Inventory Balance 255,000
Physical Count 252,500
2,500 difference
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Adjustments to Inventory Example

• What is the journal entry?

December 31 Cost of Goods Sold
2,500 Inventory
2,500 To adjust inventory to physical count
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Closing Entries for a Merchandising Business
Revenues
Income Summary
2,760,000 7,348
2,767,348
1,884,348
C.G.S.
883,000
1,490,400
Sales Discount
22,824
Returns and A.
Capital Account
32,605
Other Exp.
883,000
338,519
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Objective 4

• Prepare a merchandisers
• financial statements.

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Income Statement Formats

• There are two basic formats for the income
  statement
• Multi-step
• Single-step

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Multi-Step Format
Sporting Store Income Statement Year Ended
December 31, 2002
Sales revenue 2,760,000 Sales
discounts 22,824 Returns and
allowances 32,605 Net sales
revenue 2,704,571 Cost of goods
sold 1,490,400 Gross margin 1,214
,171
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Multi-Step Format
Gross margin 1,214,171 Operating
expenses Wage expense 166,285 Rent
expense 137,000 Insurance
expense 16,302 Depreciation
expense 9,781 Supplies
expense 8,151 Operating
income 876,652
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Multi-Step Format
Operating income 876,652 Other revenue
and expenses Interest revenue
7,348 Interest expense 1,000 Net
income 883,000
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Single-Step Format
Sporting Store Income Statement Year Ended
December 31, 2002
Revenues Net sales (net of sales
discounts) 2,704,571 Interest revenue
7,348 Total revenues 2,711,919
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Single-Step Format
Expenses Cost of goods sold 1,490,400 Wag
e expense 166,285 Rent
expense 137,000 Interest
expense 1,000 Insurance
expense 16,302 Depreciation
expense 9,781 Supplies
expense 8,151 Total
expenses 1,828,919 Net income
883,000
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Objective 5

• Use the gross margin percentage
• and the inventory turnover
• ratio to evaluate a business.

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Using the Financial Statements for Decision Making
Gross profit percentage Gross profit Net
sales revenue
Inventory turnover Cost of goods sold Average
inventory
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Gross Profit on 1 for Three Merchandisers
1.00 0.75 0.50 0.25 0.00
Gross margin 0.45
Gross margin 0.21
Gross margin 0.42
Cost of goods sold 0.79
Cost of goods sold 0.58
Cost of goods sold 0.55
Wal-Mart Stores, Inc.
Austin Sound
Target Corporation
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Rate of Inventory Turnover for Three Merchandisers
Wal-Mart Stores, Inc.
7.0 times per year
1
2
3
4
5
6
7
Target Corporation
5.4 times per year
1
2
3
4
5
Austin Sound
2.3 times per year
1
2
Jan Mar Jun Sep Dec
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Objective 6

• Compute the
• cost of goods sold.

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Computing the Cost of Goods Sold in a Periodic
System
Purchases of inventory Purchases discounts
Purchases returns and allowances Net purchases
Beginning inventory Net purchases
Freight-in Cost of goods available for sale
Cost of goods available for sale Ending
inventory Cost of goods sold
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Computing the Cost of Goods Sold in a Periodic
System
Beginning Inventory 20,000
Ending Inventory 15,000
Cost of Goods Available for Sale 121,000
Cost of Goods Sold 106,000
Purchases and Freight-In 101,000
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End of Chapter 5