Inventories

1
Accounting for Merchandising Operations
Chapter
5
2
Learning objective

• Describe merchandising activities and identify
  income components for a merchandising company.
• Identify and explain the inventory asset of a
  merchandising company.
• Prepare adjustments and close accounts for a
  merchandising company.
• Define and prepare multiple-step and single-step
  income statements.

3
Learning objective

• Describe merchandising activities and identify
  income components for a merchandising company.

4
Merchandising Activities

• Service organizations sell time to earn revenue.
• Examples accounting firms, law firms, and
  plumbing services

Revenues
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Merchandising Activities

• Merchandising companies sell goods to earn
  revenue.
• Example supermarket

Revenues
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Merchandising Activities
Merchandising Companies
Manufacturer
Wholesaler
Retailer
Customer
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Reporting Income for a Merchandiser

• Merchandising companies sell products to earn
  revenue.
• Examples sporting goods, clothing, and auto
  parts stores

Cost ofGoods Sold
GrossProfit
Expenses
NetIncome
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Operating Cycle for a Merchandiser

• Begins with the purchase of merchandise and ends
  with the collection of cash from the sale of
  merchandise.

Credit Sale
Cash Sale
Cashcollection
Purchases
Purchases
Merchandiseinventory
Accountreceivable
Cashsales
Merchandiseinventory
Credit sales
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Learning objective

• Identify and explain the inventory asset of a
  merchandising company.

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Inventory Systems
Beginninginventory
Net cost ofpurchases

Merchandiseavailable for sale

Ending Inventory
Cost of GoodsSold

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Inventory Systems

• Perpetual inventory system continuously updates
  accounting records for merchandising transactions
  specifically, for those records of inventory
  available for sale and inventory sold.
• Periodic inventory system updates the accounting
  records for merchandise transactions only at the
  end of a period.

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Learning objective

• Analyze and record transactions for merchandising
  purchases and sales using a perpetual system.

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Accounting for Merchandise Purchases

• Trade discounts vs. purchase discounts
• Purchase returns and allowances
• Transportation costs

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Accounting for Merchandise Purchases
On June 20, Jason, Inc. purchased 14,000 of
Merchandise Inventory paying cash.
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?
?
?
?Seller ?Invoice date ?Purchaser ?Order
number?Credit terms ?Freight terms?Goods
?Invoice amount
?
?
?
?
?
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Trade Discounts

• Used by manufacturers and wholesalers to offer
  better prices for greater quantities purchased.

Example Matrix, Inc. offers a 30 trade discount
on orders of 1,000 units or more of their
popular product Racer. Each Racer has a list
price of 5.25.
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Purchase Discounts

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

Terms Time Due
Discount Period
Credit Period
Full amount less discount
Full amount due
Purchase or Sale
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Purchase Discounts
2/10,n/30
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Purchase Discounts

• On May 7, Jason, Inc. purchased 27,000 of
  Merchandise Inventory on account, credit terms
  are 2/10, n/30.

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Purchase Discounts

• On May 15, Jason, Inc. paid the amount due on the
  purchase of May 7.

27,000 2 540 discount
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Purchase Discounts

• After we post these entries, the accounts
  involved look like this

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Failure to Pay Within the Discount Period

• If we fail to take a 2/10, n/30 discount, is it
  really expensive?

365 days 20 days 2 36.5 annual rate
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Purchase Returns and Allowances

• 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.

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Purchase Returns and Allowances

• On May 9, Matrix, Inc. purchased 20,000 of
  Merchandise Inventory on account, credit terms
  are 2/10, n/30.

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Purchase Returns and Allowances

• On May 10, Matrix, Inc. returned 500 of
  defective merchandise to the supplier.

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Purchase Returns and Allowances

• On May 18, Matrix, Inc. paid the amount owed for
  the purchase of May 9.

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Transportation Costs
Seller
Buyer
Merchandise
FOB shipping point (buyer pays)
FOB destination (seller pays)
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Transportation Costs

• On May 12, Jason, Inc. purchased 8,000 of
  Merchandise Inventory for cash and also paid 100
  transportation costs.

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Quick Check ?
On July 6, 2005 Seller Co. sold 7,500 of
merchandise to Buyer, Co. terms of 2/10,n/30.
The shipping terms were FOB shipping point. The
shipping cost was 100. Which of the following
will be part of Buyers July 6 journal entry?
a. Credit Sales 7,500 b. Credit Purchase
Discounts 150 c. Debit Merchandise Inventory
100 d. Debit Accounts Payable 7,450
FOB shipping point indicates the buyer ultimately
pays the freight. This is recorded witha debit
to Merchandise Inventory.
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Itemized Cost of Merchandise Purchased
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Accounting for Merchandise Sales

• Sales of merchandise
• Sales discounts
• Sales returns and allowances

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Accounting for Merchandise Sales
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Sales of Merchandise

• On March 18, Diamond Store sold 25,000 of
  merchandise on account. The merchandise was
  carried in inventory at a cost of 18,000.

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Sales Discounts

• On June 8, Barton Co. sold merchandise costing
  3,500 for 6,000 on account. Credit terms were
  2/10, n/30. Lets prepare the journal entries.

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Sales Discounts

• On June 17, Barton Co. received a check for
  5,880 in full payment of the June 8 sale.

Contra Revenue Account
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Sales Returns and Allowances

• On June 12, Barton Co. sold merchandise costing
  4,000 for 7,500 on account The credit terms
  were 2/10, n/30.

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Sales Returns and Allowances

• On June 14, merchandise with a sales price of
  800 and a cost of 470 was returned to Barton.
  The return is related to the June 12 sale.

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Sales Returns and Allowances

• On June 20, Barton received the amount owed to it
  from the sale of June 12.

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Learning objective

• Prepare adjustments and close accounts for a
  merchandising company.

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Lets complete the accounting cycle by preparing
the closing entries for Barton.
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Step 1 Close Credit Balances in Temporary
Accounts to Income Summary.
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Step 2 Close Debit Balances in Temporary
Accounts to Income Summary.
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Step 3 Close Income Summary to Owners Capital
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Step 4 Close Withdrawals Account to Owners
Capital.
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Learning objective

• Define and prepare multiple-step and single-step
  income statements.

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Income Statement Formats

• Multiple-Step
• Single-Step

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Multiple-Step Income Statement
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Operating expenses

• Selling expenses include the expenses of
  promoting sales by displaying and advertising
  merchandise, making sales, and delivering goods
  to customers.
• General and administrative expenses support a
  companys overall operations and include expenses
  related to accounting, HR management, and
  financial management.

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Single-Step Income Statement
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Single-Step Income Statement
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Multiple-Step vs. Single-Step Income statement

• A multiple-step income statement format shows
  detailed computations of net sales and other
  costs and expenses, and report subtotals for
  various classes of items.
• Gross profit
• Income from operations
• Net income
• A single-step income statement lists revenues and
  expenses with very few categories.

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Classified Balance Sheet
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Acid-Test and Gross Margin Ratios
A common rule of thumb is the acid-test ratio
should have a value of at least 1.0 to conclude a
company is unlikely to face liquidity problems in
the near future.
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Gross Margin Ratio
Percentage of dollar sales available to cover
expenses and provide a profit.
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Homework for chapter 5

• Ex 5-1, 5-4, 5-5, 5-12
• Problem 5-1A, 5-4A
• Due on June 19, 2006 (Monday)

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End of Chapter 5