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Chapter 05. Accounting for Merchandising Operations. Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services. Service Companies. C 1. Merchandiser. C 1. Merchandising Companies. Manufacturer. Wholesaler. Retailer. Consumers.
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Chapter 05 Accounting for Merchandising Operations
Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Service Companies C 1
Merchandiser C 1 Merchandising Companies Manufacturer Wholesaler Retailer Consumers
Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Reporting Income for a Merchandiser C 1
Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. Operating Cycle for a Merchandiser C 2
Perpetual systems continually update accounting records for merchandising transactions Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period Inventory Systems C 2
Merchandise Purchases P1 On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.
Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Trade Discounts P1 Example Z-Mart offers a 30% trade discount for orders of 1,000 units or more on its popular product Racer. Each Racer has a list price of $5.25.
A deduction from the invoice price granted to induce early payment of the amount due. Purchase Discounts P1
Number of Days Discount Is Available Otherwise, Net (or All) Is Due in 30 Days Discount Percent CreditPeriod Purchase Discounts P1 2/10,n/30
On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. Purchase Discounts P1
On November 12, Z-Mart paid the amount due on the purchase of November 2. Purchase Discounts P1
After we post these entries, the accounts involved look like these: Purchase Discounts P1
Purchase Return . . . Merchandise returned by the purchaser to the supplier. Purchase Allowance . . . A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. Purchase Returns and Allowances P1
On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. Purchase Returns and Allowances P1
Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. Purchase Returns and Allowances P1
Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. Transportation Costs P1
Sales of Merchandise P2 Each sales transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer. Recognition of the cost of merchandise sold to a customer.
On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. Sales of Merchandise P2
Sales Discounts P2 Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. Sales Discounts P2 The account was paid in full within the 60-day period. The account was paid in full within the 10-day discount period.
Sales Returns and Allowances P2 Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales. Sales returns refer to merchandise that customers return to the seller after a sale. Sales allowances refer to reductions in the selling price of merchandise sold to customers.
Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items sell for $800 and cost $600. Sales Returns and Allowances P2 Sales Returns and Allowances is a Contra Account subtracted from sales Defective inventory valued at estimated value not its cost
Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. Sales Allowance Sales Allowances P2
Beginning inventory Net purchases Merchandise available for sale Period 1 Ending inventory Cost of goods sold To Income Statement To Balance Sheet To Income Statement To Balance Sheet Merchandising Cost Flow in the Accounting Cycle P2 Beginning inventory Net purchases Merchandise available for sale Period 2 Ending inventory Cost of goods sold
Adjusting Entries for Merchandisers P3 A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration. Z-Mart’s Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. Inventory Shrinkage difference of physical count and recorded inventory
P4 A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.
Classified Balance Sheet HighlyLiquid LessLiquid
Global View Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. Financial Statement Differences Order of expenses Separate disclosures Presentation of expenses Classification of operating and nonoperating expenses Alternative measures of income Order of current and noncurrent items on the balance sheet
Acid-Test Ratio Quick Assets Current Liabilities = Acid-Test Ratio A1 Cash + S-T Investments + Receivables Current Liabilities Acid-Test Ratio = A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future.
Gross Margin Ratio Net Sales - Cost of Goods Sold Net Sales = Gross Margin Ratio A2 Percentage of dollar sales available to cover expenses and provide a profit.
JCPenney A1/A2
Appendix 5A: Periodic Inventory System P5 (a) (b) (c) (d) (e) (f) (g) A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold.
