Accounting for Merchandising Operations

1
Unit
5
Completing the Accounting Cycle Financial
Satements
2
COMPLETING THE ACCOUNTING CYCLE

• A merchandising company requires the same types
  of adjusting entries as a service company, with
  one additional adjustment for inventory to ensure
  the recorded inventory amount agrees with the
  actual quantity on hand.
• A physical count is an important control feature
  since a perpetual system indicates what should be
  there but a count will determine what is actually
  there.

3
COMPLETING THE ACCOUNTING CYCLE

• A merchandising company also requires the same
  types of closing entries as a service company.
• The additional accounts that need to be closed
  out in a merchandising account include Sales,
  Sales Returns and Allowances, Cost of Goods Sold,
  and Freight Out.
• Merchandise Inventory is an asset account and is
  not closed at the end of the period.

4
ILLUSTRATION 5-9
STATEMENT PRESENTATION OF SALES REVENUE SECTION
As contra revenue accounts, sales returns and
allowances (and sales discounts, if any) are
deducted from sales in the income statement to
arrive at Net Sales.
5
ILLUSTRATION 5-10
CALCULATION OF GROSS PROFIT
Gross profit is calculated by deducting cost of
goods sold from net sales as follows
Gross profit is often expressed as a percentage
of sales.
6
ILLUSTRATION 5-12
CALCULATION OF NET INCOME
Net income is calculated by deducting operating
expenses from gross profit as follows
Net income is the bottom line of a companys
income statement.
7
ILLUSTRATION 5-14 This is the format of a
multi-step income statement that has both
operating and non-operating activities.As
shown, the non-operating activities are reported
immediately after the companys primary operating
activities.
8
CLASSIFIED BALANCE SHEET
On the balance sheet, merchandise inventory is
reported as a current asset and appears
immediately below accounts receivable. This is
because current assets are listed in the order of
their liquidity.
9
USING THE INFORMATION IN THE FINANCIAL STATEMENTS
Inventory is particularly important because

• It is a large current asset on the balance sheet
• It becomes a large expense on the income
  statement
• It is vulnerable to theft or misuse

10
USING THE INFORMATION IN THE FINANCIAL STATEMENTS

• A balancing act is needed to ensure that a
  sufficient, but not excessive, quantity of
  inventory is on hand.
• Two ratios help evaluate the management of
  inventory
• Inventory turnover
• Days sales in inventory

11
INVENTORY TURNOVER
Inventory turnover Cost of goods sold Average
inventory
12
DAYS SALES IN INVENTORY