Merchandise Inventory

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CHAPTER 6
MERCHANDISING TRANSACTIONS
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Service Organizations vs. Merchandising Companies

• Service organizations sell time to earn revenue
• Examples include accounting firms, law firms, and
  plumbing services
• These have been our emphasis up to now

Not a plumber!
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Service Organizations vs. Merchandising Companies

• Merchandising companies sell products to earn
  revenue
• Examples include sporting goods, clothing, and
  auto parts stores
• These will be our emphasis for the rest of the
  semester

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Merchandising Companies
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Merchandising Companies

• 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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Merchandising Companies

• CLASSIFIED INCOME STATEMENT
• a/k/a
• MULTIPLE STEP INCOME STATEMENT
• a/k/a
• SATURDAY NIGHT PAGE

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ROLL EM !
Video 1 (Approx. 6 min.)
Video 2 (Approx. 8 min.)
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Merchandising Companies
Channel of Distribution (5 points on next test)
Manufacturer
Wholesaler
Retailer
Final Customer
Can manufacturer sell direct to final customer?
(i.e., can green box be skipped?)
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Accounting Terminology

• Sales Invoice
• vs.
• Purchase Invoice
• Whats the difference?

prepares?
Who cares?
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Recording and Reporting Sales
Gross sales Less Sales discounts Less Sales
returns and allowances Net sales
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Recording Gross Sales

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

If the sale had been on account, we would debit
Accounts Receivable instead of Cash.
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Two 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 sellers or buyers books!!

Example FastBan, Inc. offers a 30 trade discount
if you purchase at least 1,000 of their most
popular product known as Zippy. Each Zippy has
a list price of 5.25.
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Two 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 sellers and buyers books
• They are pervasive

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Two 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 sellers and buyers books
• They are pervasive

3/15,n/30
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Cash (Sales) Discount Example

• On November 8, Borey Co. sold merchandise to
  West, Inc. for 6,000 on account credit terms
  2/10, n/30.

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Cash (Sales) Discount Example

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

Discount 6,000 2 120
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Other Deductions from Sales

• Sales Return
• Merchandise returned by the buyer as
  unsatisfactory or defective.
• Sales Allowance
• A deduction from the original invoice price when
  the customer keeps merchandise but is
  dissatisfied with it.

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Sales Returns and AllowancesExample

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

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Partial Income Statement
Gross sales Less Sales discounts Less Sales
returns and allowances Net sales
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Inventory Methods

• Perpetual Method
• Periodic Method

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Perpetual Method

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

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Perpetual 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 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 Merchandising Company
Closing Entry 1
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Closing Entries for Merchandising Company
Closing Entry 2
General Journal
Page 88
PR
Debit
Credit
Date
Description
Income Summary
Dec. 31
XXX
Merchandising Inventory (beginning)
XXX
Sales Discounts
XXX
Sales Returns and Allowances
XXX
XXX
Other accounts including all expenses
To close accounts with debit balances
includingthe beginning inventory account.
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Cost 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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Calculation ofCost of Goods Sold
Multiple-Step Process

• Beginning Inventory
• Purchases
• - Purchase Discounts
• - Purchase Returns and Allowances
• Transportation-in
• Cost of Goods Available for Sale
• - Ending Inventory
• Cost of Goods Sold

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Calculation ofCost of Goods Sold
Formal Income Statement Presentation
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Purchase of Merchandise

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

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Purchase of Merchandise

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

27,000 2 540 discount
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Purchase of Merchandise

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

Purchase Discounts is a Contra Purchases account.
27,000 2 540 discount
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Purchase 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 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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Transportation Costs

• Transportation-In
• Inward freight costs of acquiring merchandise.

Transportation-In is part of cost of goods sold!
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Transportation Costs

• Transportation Out/Delivery Expense
• Outgoing freight costs that must be paid by the
  seller.

Delivery Expense is a selling expense on
the income statement!
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Transportation Costs

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

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FOB Points
Shipping Point
Destination
ABC Wholesalers
Rice's Deartment Store
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FOB Points

• 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

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Transportation Cost Summary
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Transportation Cost Summary
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Periodic Method
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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Periodic Method
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Periodic Method
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Saturday Night Page, AgainP. 226
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Classified Income StatementRevenue
Earned from the sale of inventory
Alternative way to express income statement
relationships? (Hint 8th Grade) Net sales
Gross sales - (Sales disc. SRA)
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Classified Income StatementCost of Goods Sold

• 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 StatementCost of Goods Sold

• (3) Formal Income Statement Approach

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Classified Income StatementGross Margin
Gross Margin Net Sales - COGS Gross Margin is
also called Gross Profit
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Classified Income StatementTypes of Operating
Expenses

• Selling Expenses
• Administrative Expenses

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Classified Income StatementIncome from
Operations
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Classified Income StatementTypes 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 Entries
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Gross Margin Percentage
Percentage of each sales dollar available to
cover expenses and a profit
GROSS MARGIN NET SALES
GM
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THE END
WE CAN LOOK FORWARD TO A CLOSER INSPECTION OF
INVENTORY IN CHAPTER 7!