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Merchandising Operations

Merchandising Operations. Chapter 5. Merchandising Operations. Buying and selling products. Objective 1. Account for the purchase of inventory. Operating Cycle of a Merchandising Business. Inventory Systems. Periodic Perpetual. Purchase of Inventory S5-1. Inventory 10,000

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Merchandising Operations

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  1. Merchandising Operations Chapter 5

  2. Merchandising Operations • Buying and selling products

  3. Objective 1 Account for the purchase of inventory

  4. Operating Cycle of a Merchandising Business

  5. Inventory Systems • Periodic • Perpetual

  6. Purchase of Inventory S5-1 Inventory 10,000 Accounts Payable 10,000 Purchased inventory

  7. Purchase Discounts Credit terms 2/10, n/30 means 2% discount if paid within 10 days. If the discount period is missed, the full amount is due within 30 days. This decreases the cost of the inventory. • A deduction from the invoice price granted to encourage early payment of the amount due • 2/10, n/30 • n/30 • eom

  8. Inventory 10,000 200 Bal 9,800 Purchase of Inventory S5-2 Discount = $10,000 x 2% = $200 Accounts Payable 10,000 Cash 9,800 Inventory 200 Paid within discount period

  9. 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

  10. Purchase Returns and Allowances – S5-2 Inventory 100,000 Accounts Payable 100,000 Purchased inventory

  11. Inventory Purchase Returns and Allowances – S5-2 Accounts Payable 10,000 Inventory 10,000 Returned damaged goods Accounts Payable 100,000 100,000 10,000 10,000 Bal 90,000 Bal 90,000

  12. Inventory Part a. If this is paid after the discount period, the company must pay the full invoice price less the return Purchase Returns and Allowances – S5-2 Accounts Payable 90,000 Cash 90,000 Paid after the discount period Accounts Payable 100,000 100,000 10,000 10,000 90,000 Bal 0 Bal 90,000

  13. Inventory Part b: If paid within the discount period. Discount = $90,000 x 3% = $2,700 Purchase Returns and Allowances – S5-2 Accounts Payable 90,000 Cash 87,300 Inventory 2,700 Paid within discount period Accounts Payable 100,000 100,000 10,000 10,000 2,700 90,000 Bal 0 Bal 87,300

  14. Buyer Seller Goods Transportation Costs FOB Shipping Point (Buyer Pays) FOB Destination (Seller Pays)

  15. Transportation Costs • Freight in • Transportation cost on purchased goods • Debit inventory • Freight-out • Transportation cost on goods sold • Debit an expense (delivery expense)

  16. E5-15 Apr 30 Inventory 6,000 Accounts Payable 6,000 Purchased inventory

  17. Inventory E5-15 Apr 30 Inventory 300 Cash 300 Paid freight charges Accounts Payable 6,000 6,000 300 Bal 6,300

  18. Inventory E5-15 Apr 30 Accounts Payable 1,000 Inventory 1,000 Returned unsuitable goods Accounts Payable 6,000 1,000 6,000 1,000 300 Bal 5,000 Bal 5,300

  19. Inventory Discount = $5,000 x 3% = $150 Remember, do not compute the discount on the freight charges….only the invoice price E5-15 May 14 Accounts Payable 5,000 Cash 4,850 Inventory 150 Paid within discount period Accounts Payable 6,000 1,000 6,000 1,000 300 150 5,000 Bal 5,150 Bal 0

  20. Objective 2 Account for the sale of inventory

  21. Sale of Inventory • Sales Revenue • Amount earned from selling inventory • Revenue account • Cost of Goods Sold • Cost of inventory that has been sold to customers • Expense account

  22. Sale of Inventory • Sales Returns & Allowances • When customer returns goods or the seller grants a reduction in price to customer • Contra-revenue account (debit balance) • Sales Discounts • If customer pays within the discount period allowed by the seller • Contra-revenue account (debit balance) • Delivery Expense (Freight Out)

  23. Remember, there are always two entries to record a sale when using the perpetual inventory system. One to record the selling price to the customer and the second to remove the inventory from your books at the amount your company paid to acquire it Sales TransactionsS5-5 Accounts Receivable 60,000 Sales Revenue 60,000 To record sales on account Cost of Goods Sold 32,000 Inventory 32,000 To record cost of sales

  24. Sales TransactionsS5-5 What if there were no credit terms allowed? Cash 60,000 Accounts Receivable 60,000 Collected on account

  25. Sales TransactionsS5-5 Cash 58,800 Sales Discount 1,200 Accounts Receivable 60,000 Collected on account

  26. Sales TransactionsS5-5 Sales $60,000 Sales Discount (1,200) Net Sales $58,800

  27. S5-6 Accounts Receivable 10,000 Sales Revenue 10,000 To record sales on account Cost of Goods Sold 6,000 Inventory 6,000 To record cost of sales

  28. S5-6 When merchandise is returned, you also have two entries Sales Returns & Allowances 1,000 Accounts Receivable 1,000 To record 100 books returned Inventory 600 Cost of Goods Sold 600 Returned books to inventory

  29. S5-6 Accounts Receivable Sales 10,000 1,000 10,000 Bal 9,000 Sales Discounts Sales Returns & Allowances 1,000 Bal 1,000

  30. S5-6 Cash 8,820 Sales Discount 180 Accounts Receivable 9,000 Collected on account

  31. S5-6 Accounts Receivable Sales 10,000 1,000 10,000 9,000 Bal 0 Sales Discounts Sales Returns & Allowances 180 1,000 Bal 1,000 Bal 180 Cost of Goods Sold 6,000 600 Bal 5,400

  32. S5-7 Sales $10,000 Sales Returns & Allowances (1,000) Sales Discounts (180) Net Sales $8,820 Cost of Goods Sold (5,400) Gross Profit $3,420

  33. Objective 3 Adjust and close the accounts of a merchandising business

  34. Adjusting Inventory • If physical count of inventory is different from amount on the books – Inventory Shrinkage • Debit Cost of Goods Sold • Credit Inventory

  35. S5-8 $65,000 (per books) - 63,900 (physical count) $1,100 (shrinkage) Cost of Goods Sold 1,100 Inventory 1,100 Adjustment for shrinkage

  36. Closing Entries • Close all income statement accounts with credit balances to Income Summary • Close all income statement accounts with debit balances to Income Summary • Close Income Summary to Capital • Close Withdrawals to Capital

  37. S5-9 Dec 31 Sales Revenue 700,000 Income Summary 700,000 31 Income Summary 424,000 Cost of Goods Sold 385,000 Rent Expense 20,000 Depreciation Expense 10,000 Sales Discounts 9,000

  38. S5-9 Dec 31 Income Summary 276,000 J. Hayes, Capital 276,000 (700,000 – 424,000) 31 J. Hayes, Capital 60,000 J. Hayes, Withdrawals 60,000

  39. Objective 4 Prepare a merchandiser’s financial statements

  40. Income Statement Net sales - Cost of goods sold Gross profit - Operating expenses: Selling expenses – related to selling and marketing the inventory General expense – office expenses Operating income + Other revenue and expense Net income

  41. Income Statement Formats • Multiple-Step – see previous slide • Contains key subtotals • Single-Step • Total revenues minus total expenses

  42. S5-10 Multiple step has key subtotal, gross profit

  43. S5-10 Single step combines all expenses

  44. Objective 5 Use gross profit percentage and inventory turnover to evaluate a business

  45. Gross Profit Percentage Gross Profit Net Sales Percentage of dollar sales available to cover expenses and provide a profit

  46. Rate of Inventory Turnover Cost of goods sold Average inventory Average inventory = (Beg inventory + End inventory) / 2 How rapidly is inventory sold?

  47. E5-25 Net sales $65 Cost of sales (33) Gross profit $32 Gross profit percentage: Gross Profit Net Sales $32 $65 49% = =

  48. E5-25 Inventory Turnover: Cost of goods sold Average inventory $33 $(4 + 3)/2 9.4 times = =

  49. Objective 6 Compute cost of goods sold in a periodic inventory system

  50. Cost of Goods Sold – Periodic Inventory System Beginning Inventory Goods Available for Sale + Purchases

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