Accounting for Merchandising Operations

1. Accounting for Merchandising Operations Chapter 5

2. Learning objective • Specialty of merchandising activities • Accounting for merchandise purchasing • Accounting for merchandise sales • Completing Accounting cycle • Financial statement format • Decision Analysis: • Current Ratio • Acid-test ratio • Gross margin ratio • Case: Walmart & Target

3. Merchandising companies sell goods to earn revenue. Example: supermarket Expenses Equals Netincome Minus 1. Specialties of Merchandising Activities Revenues

4. Merchandising Activities Merchandising Companies Manufacturer Wholesaler Retailer Customer

5. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Minus Equals Minus Equals NetSales Reporting Income for a Merchandiser Cost ofGoods Sold Expenses NetIncome GrossProfit

6. Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Operating Cycle for a Merchandiser Credit Sale Cash Sale Cashcollection Purchases Purchases Merchandiseinventory Accountreceivable Cashsales Merchandiseinventory Credit sales

7. Inventory Systems Beginninginventory Net cost ofpurchases + Merchandiseavailable for sale = Ending Inventory Cost of GoodsSold +

8. 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. What are the disadvantages of periodic inventory system?

9. 2. Accounting for Merchandise Purchases • Trade discounts vs. purchase discounts • Purchase returns and allowances • Transportation costs

10.    SellerInvoice datePurchaser Order numberCredit termsFreight termsGoodsInvoice amount     

11. Accounting for Merchandise Purchases On November 2, Z-Mart, purchased $1200 of Merchandise Inventory by paying cash.

12. Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Trade Discounts 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.

13. Number of Days Discount Is Available Otherwise, Net (or All) Is Due Discount Percent CreditPeriod Purchase Discounts Credit term 2/10,n/30

14. A deduction from the invoice price granted to induce early payment of the amount due. Purchase Discounts Terms Time Due Discount Period Credit Period Full amount less discount Full amount due Purchase or Sale

15. On Nov 2, Z-Mart purchased $1200 of Merchandise Inventory on account, credit terms are 2/10, n/30. Purchase Discounts

16. On Nov. 12, Z-Mart paid the amount due on the purchase of Nov. 2. Purchase Discounts $1,200 × 2% = $24 discount

17. After we post these entries, the accounts involved look like this: Merchandise Inventory Accounts Payable 11/12 1,200 11/02 1,200 11/02 1,200 11/12 24 Bal. 1,176 Bal. 0 Purchase Discounts

18. If we fail to take a 2/10, n/30 discount, is it really expensive? Days in a year Number of additional days before payment Percent paid to keep money Failure to Pay Within the Discount Period 365 days ÷ 20 days × 2% =36.5% annual rate

19. 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.

20. On Nov. 9, Z-Mart purchased $20,000 of Merchandise Inventory on account, credit terms are 2/10, n/30. Purchase Returns and Allowances

21. On Nov. 10, Z-Mart returned $500 of defective merchandise to the supplier. Purchase Returns and Allowances

22. On Nov. 18, Z-Mart paid the amount owed for the purchase of Nov 9. Purchase Returns and Allowances

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

24. On Nov. 12, Z-Mart purchased $8,000 of Merchandise Inventory for cash and also paid $100 transportation costs. Transportation Costs

25. 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 Buyer’s 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.

26. Itemized Cost of Merchandise Purchased

27. 3. Accounting for Merchandise Sales • Sales of merchandise • Sales discounts • Sales returns and allowances

28. Sales discounts and returns and allowances are Contra Revenueaccounts. Accounting for Merchandise Sales

29. On Nov. 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise was carried in inventory at a cost of $1,600. Sales of Merchandise

30. On Nov. 12, Z-Mart sold merchandise costing $600 for $1,000 on account. Credit terms were 2/10, n/60. Let’s prepare the journal entries. Sales Discounts

31. On Nov. 22, Z-Mart received a check for $980 in full payment of the Nov. 12 sale. Sales Discounts Contra Revenue Account

32. On Nov. 3, Z-Mart sold merchandise costing $4,000 for $7,500 on account The credit terms were 2/10, n/30. Sales Returns and Allowances

33. On Nov. 6, customer returns merchandises with a sales price of $800 and a cost of $600. The return is related to the Nov. 3 sale. Sales Returns and Allowances

34. Assume that $800 of merchandise Z-Mart sold on Nov. 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. Sales Returns and Allowances

35. 4. Completing accounting cycle • Prepare adjustments and close accounts for a merchandising company.

36. Shrinkage • Compare a physical count of inventory with recorded amounts. • Z-Mart’s Merchandise Inventory account at the end of year 2005 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. The adjusting entry is: 12/31/2005 Dr. Cost of goods sold 250 Cr. Merchandise inventory 250 To adjust for $250 shrinkage.

37. Completing the accounting cycle Let’s complete the accounting cycle by preparing the closing entries for Z-Mart.

38. Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

39. Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

41. Step 3: Close Income Summary to Owner’s Capital

42. Step 4: Close Withdrawals Account to Owner’s Capital.

43. 5. Financial statement format • Define and prepare multiple-step and single-step income statements.

44. Multiple-Step Single-Step Income Statement Formats

45. Multiple-Step Income Statement

46. 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 company’s overall operations and include expenses related to accounting, HR management, and financial management.

47. Single-Step Income Statement

48. 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.

49. Classified Balance Sheet

50. 6. Decision Analysis - Current Ratio & Acid-Test Ratio • Helps assess the company’s ability to pay its debts in the near future • Liquidity measure