Merchandising

1. Merchandising 6 Merchandisers need additional accounts • Learning Objectives • Describe selected merchandising activities • Account for the purchase and sale of merchandise inventory • Account for purchase and sales returns and allowances

2. Income Statement Service vs Merchandising Merchandising Firm Sales (Cost of Goods Sold) GrossProfit (Expenses) Net Income Service Firm Sales (Expenses) Net Income No COGS

3. Merchandising accounts Merchandising firms need: Inventory Cost of Goods Sold* accounts. *perpetual inventory method

4. Merchandising firms sell physical inventory Merchandising Firms Wholesaler Retailer Customer Manufacturer

5. Objective 6.1: Describe selected merchandising activities Wind Supply Santana Sailboards Freight In Terms FOB SHIPPING POINT Buyer pays freight-in Buyer owns merchandise on carrier at this point FOB DESTINATION Seller pays freight-in Buyer owns merchandise when unloaded at this point O6.1 Overland Trucking

6. Describe selected merchandising activities –trade discounts Trade discounts are used by merchandisers to simplified their publications of prices. Rather than producing many different price lists, a list price publication is prepared. From the list price, various trade discounts are then negotiated with customers. For example Santana Sailboard gets a 25% trade discount off of Wind Supply’s list prices. Wind Supply List Prices __________ ______ __________ _______________ ______ __________ ______ __________ ______ $500 list price – (.25 *$500) = $375 purchase price Trade Discount 25% O6.1

7. Describe selected merchandising activities The periodic method keeps track of purchases using a temporary purchases account. Adding net purchases to beginning inventory provides the total available that could have been sold. Subtracting the physical count of inventory reveals the Cost of Goods Sold only after the ending inventory has been tallied. Periodic Formula O6.1

8. Describe selected merchandising activities –periodic formula Net Purchases Beginning Inventory + Goods Available For sale Determined with a physical count. Periodic Formula Ending Inventory Cost of Goods Sold + O6.1

9. Accounts Receivable Inventory Describe selected merchandising activities –operating cycle If credit terms are offered to customers, an increased operating cycle results. The merchandiser is obliged to wait longer before cash is received from each credit sale. Credit Sale O6.1 Cash Sale Inventory

10. Describe selected merchandising activities –sales invoice Shipping terms FOB shipping point O6.1

11. Describe selected merchandising activities-sales invoice Credit terms are described here O6.1

12. Describe selected merchandising activitiescredit terms Credit period Discount period Discount percentage 2/10/n30 O6.1

13. Objective 6.2: Account for the purchase and sale of merchandise inventory • Reminder • We will use the perpetual inventory method and record purchases at gross amounts • Accounting rules direct the cost of inventory to include all the costs of purchasing inventory, transporting it to the buyer’s place of business and bringing it to a saleable condition O6.2

14. Example –purchase of merchandise March 14, 2010, Santana Sailboards completed the purchase on account (per previous invoice shown) of inventory costing$19,632 plus $325 for freight in charges. Credit terms are 2/10/n30. The journal entry to record the purchase is shown below. BUYER The asset account Inventory is increased. O6.2

15. Buyer pays invoice Cost Concept Santana pays the Wind Supply invoice within the discount period. Following the Cost Concept, the totals in the Inventory account must be reduced by the amount of the discount. BUYER Cost of merchandise inventory $19,632 * .02 = $392.64 Per the invoice terms, the purchase discount of 2% is not applied to the shipping charges. O6.2

16. Seller –needs contra revenue accounts Sales Discounts (4) Sales Returns & Allowances (2) Net Sales 94 100 Sales

17. Seller records payment from buyer Wind Supply records the payment on account received from Santana Sailboards. SELLER Remember that the entire receivable is satisfied (paid) with the payment made within the discount period. Sales price of merchandise inventory, $19,632 * .02 = $392.64 O6.2

18. Gross vs net method of recording purchase A buyer could choose to record the initial purchase on account at the net amount due within the discount period. Consider a $10,000 purchase of merchandise on account with 2/10/n30 credit terms. BUYER records GROSS amount due BUYER records NET amount due Purchase price of merchandise inventory, $10,000 * .98 = $9,800 O6.2

19. Payments using net method of recording purchases BUYER pays NET amount due within discount period BUYER pays NET amount due after discount period The Discounts Lost must be reported as an expense, immediately bringing attention to the failure to achieve the discount. O6.2

20. Recording sales using the perpetual method The sale on account below requires a two step journal entry. . . SELLER 1 2 • PERPETUAL INVENTORY SYSTEM • Record the sale itself • Record the affect on inventory O6.2

21. Objective 6.3: Account for purchase and sales returns and allowances • A return occurs when the buyer gives purchased merchandise back to the seller. • An allowance occurs when the seller agrees to reduce the amount the buyer owes the seller for a variety of reasons including damage, late delivery, incorrect merchandise etc O6.3

22. Account for purchase and sales returns and allowances • In a return, the inventory is given back to the seller • In an allowance, the buyer does not return the inventory to the seller. • To document a return or allowance the seller often issues a credit memo to the buyer O6.3

23. Below is the buyer’s recording of a return of $1,585 of merchandise to the seller. Account for purchase and sales returns and allowances BUYER The buyer receives and records a $1,585 credit memo from the seller for merchandise returned O6.3

24. Seller’s two step process • Undo the sale using a contra revenue account • Update the inventory if the merchandise is saleable The same return from the seller’s perspective SELLER 1 2 The seller uses a contra revenue account to eliminate the effect of the sale O6.3

25. Assume that buyer and seller agree to a $350 allowance involving a previous inventory purchase. The journal entries to record the allowance by the buyer and seller are shown. . . Recording an allowance in a merchandise transaction BUYER SELLER O6.3

26. End Unit 6