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Learning Objectives

Power Notes. Chapter F5. Accounting for Merchandising Businesses. 1. Nature of Merchandising Business 2a. Accounting for Purchases 2b. Accounting for Sales 2c. Transportation Costs 2d. Merchandise Transactions 3. Merchandising Chart of Accounts 4. Merchandising Income Statement

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Learning Objectives

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  1. Power Notes ChapterF5 Accounting for Merchandising Businesses 1. Nature of Merchandising Business 2a. Accounting for Purchases 2b. Accounting for Sales 2c. Transportation Costs 2d. Merchandise Transactions 3. Merchandising Chart of Accounts 4. Merchandising Income Statement 5. Merchandising Accounting Cycle 6. Financial Analysis and Interpretation Learning Objectives C5

  2. Power Notes ChapterF5 Accounting for Merchandising Businesses Slide # Power Note Topics • 3 • 6 • 8 • 13 • 25 • 27 • 34 • Nature of Merchandising Businesses • Inventory Costs and Relationships • Perpetual Inventory Systems • Merchandising Transactions • Merchandising Chart of Accounts • Merchandising Financial Statements • Ratio of Net Sales to Assets Note: To select a topic, type the slide # and press Enter.

  3. Merchandising and Inventory • Merchandising involves selling inventory • Inventory is usually an important asset • Inventory must be accounted for periodically or perpetually • Traditional periodic method is often being replaced by perpetual inventory accounting

  4. Income Statement Comparison Service Business Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 20% of revenues Merchandising Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 5% of revenues

  5. Income Statement Comparison Service Business Fees earned $150,000 Operating expenses 120,000 Net income $ 30,000 20% of revenues Merchandising Business Sales revenue $600,000 Cost of mdse. sold 450,000 Gross profit $150,000 Operating expenses 120,000 Net income $ 30,000 75% of revenues 5% of revenues

  6. Inventory Costs and Relationships LIABILITIES Merchandise Inventory OWNER’S EQUITY ASSETS overstated understated overstated overstated Net Income Cost of Mdse. Sold REVENUES COSTS &EXPENSES If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . .

  7. Inventory Costs and Relationships LIABILITIES Merchandise Inventory OWNER’S EQUITY ASSETS understated overstated understated understated Net Income Cost of Mdse. Sold REVENUES COSTS &EXPENSES If merchandise inventory is . . . . . . . Cost of merchandise sold is . . . . . . Gross profit and net income are . . . Ending owner’s equity is . . . . . . . . .

  8. Advantages of Using Perpetual Inventory • Continuous determination of inventory value • Continuous determination of gross profit • Affordable with computers, scanners, and bar codes on most products • Perpetual inventory accounting provides management controls • Managers know which items are selling fastest and the profit margin on those items

  9. A A A B Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse. Inventory Mdse. Inventory 5,000 Accts. Payable 5,000 5,000 Cost of Mdse. Sold In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise

  10. A B A Bal B A B C Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse. Inventory Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 5,000 1,000 4,000 Cost of Mdse. Sold In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandise

  11. A B A C B Bal C C A B C Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse. Inventory Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Accts. Receivable 3,250 Sales 3,250 Cost of Mdse. Sold 2,500 Mdse. Inventory 2,500 5,000 1,000 2,500 1,500 Cost of Mdse. Sold 2,500 In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandise

  12. A B A C B Bal C C A B C Perpetual Inventory System General Journal General Ledger Description Debit Credit Mdse. Inventory Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Payable 1,000 Mdse. Inventory 1,000 Accts. Receivable 3,250 Sales 3,250 Cost of Mdse. Sold 2,500 Mdse. Inventory 2,500 5,000 1,000 2,500 1,500 Cost of Mdse. Sold 2,500 In a perpetual system, Mdse. Inventory is an active asset account. All changes are recorded as they occur. Purchase on account Return of merchandise Sale of merchandise

  13. No Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date.

  14. No Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. Yes 2% of invoice amount is allowed as a cash discount.

  15. No Credit Terms, Cash Discounts Credit Terms: 2/10, n/30 Is invoice paid within 10 days of invoice date? Full amount is due within 30 days of invoice date. Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice $1,500 Less 2% discount 30 Net cost paid $1,470 Yes 2% of invoice amount is allowed as a cash discount.

  16. Selling and Buying Merchandise Inventory Seller Buyer Description Debit Credit Description Debit Credit Mdse. Inventory 1,470 Accts. Payable 1,470 Accts. Receivable 1,500 Sales 1,500 Cost of Mdse. Sold 900 Mdse. Inventory 900 Recorded at net cost $1,500 - $30 (discount) Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period.

  17. Selling and Buying Merchandise Inventory Seller Buyer Description Debit Credit Description Debit Credit Mdse. Inventory 1,470 Accts. Payable 1,470 Accts. Payable 1,470 Cash 1,470 Accts. Receivable 1,500 Sales 1,500 Cost of Mdse. Sold 900 Mdse. Inventory 900 Cash 1,470 Sales Discounts 30 Accts. Receivable 1,500 Recorded at net cost $1,500 - $30 (discount) Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period.

  18. Selling and Buying Merchandise Inventory Seller Buyer Description Debit Credit Description Debit Credit Mdse. Inventory 1,500 Accts. Payable 1,500 Accts. Payable 1,500 Mdse. Inventory 30 Cash 1,470 Accts. Receivable 1,500 Sales 1,500 Cost of Mdse. Sold 900 Mdse. Inventory 900 Cash 1,470 Sales Discounts 30 Accts. Receivable 1,500 Recorded at full cost Jan 12. Merchandise was sold with credit terms of 2/10, n/30. Jan 22. Payment was made within the discount period.

  19. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Mdse. Inventory 5,000 Accts. Payable 5,000 Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

  20. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 Mdse. Inventory 5,000 Accts. Payable 5,000 No entry. Transportation Out 250 Cash 250 July 7. Scully Company paid transportation costs of $250, for delivery of merchandise sold to Burton Co.

  21. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Receivable 5,000 Sales 5,000 Cost of Mdse. Sold 3,500 Mdse. Inventory 3,500 Transportation Out 250 Cash 250 Mdse. Inventory 5,000 Accts. Payable 5,000 No entry. Accts. Payable 1,000 Mdse. Inventory 1,000 Sales Ret. & Allow. 1,000 Accts Receivable 1,000 Mdse. Inventory 700 Cost of Mdse. Sold 700 July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

  22. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Accts. Payable 4,000 Cash 4,000 Cash 4,000 Accts. Receivable 4,000 July 15. Scully Company received payment from Burton Co. for purchase of July 1.

  23. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Cash 4,000 Accts. Receivable 4,000 Accts. Payable 4,000 Cash 4,000 Mdse. Inventory 12,500 Accts. Payable 12,500 Accts. Receivable 12,500 Sales 12,000 Cash 500 Cost of Mdse. Sold 7,200 Mdse. Inventory 7,200 July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.

  24. Accounting for Merchandise Transactions Scully Company (Seller) Burton Co. (Buyer) Description Debit Credit Description Debit Credit Cash 4,000 Accts. Receivable 4,000 Accts. Receivable 12,500 Sales 12,000 Cash 500 Cost of Mdse. Sold 7,200 Mdse. Inventory 7,200 Accts. Payable 4,000 Cash 4,000 Mdse. Inventory 12,500 Accts. Payable 12,500 Accts. Payable 12,500 Mdse. Inventory 240 Cash 12,260 Cash 12,260 Sales Discounts 240 Accts. Receivable 12,500 July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

  25. NetSolutions Merchandising Chart of Accounts Balance Sheet Accounts 200 Liabilities 210 Accounts Payable 211 Salaries Payable 212 Unearned Rent 215 Notes Payable 300 Stockholders’ Equity 310 Capital Stock 311 Retained Earnings 312 Dividends 313 Income Summary 100 Assets 110 Cash 111 Notes Receivable 112 Accounts Receivable 113 Interest Receivable 115 Merchandise Inventory 116 Office Supplies 117 Prepaid Insurance 120 Land 123 Store Equipment 124 Accumulated Depreciation— Store Equipment 125 Office Equipment 126 Accumulated Depreciation— Office Equipment

  26. NetSolutions Merchandising Chart of Accounts Income Statement Accounts 500 Costs and Expenses 510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense— Store Equipment 523 Transportation Out 529 Misc. Selling Expense 530 Office Salaries Expense 531 Rent Expense 532 Depreciation Expense— Office Equipment 533 Insurance Expense 534 Office Supplies Expense 539 Misc. Admin. Expense 400 Revenue 410Sales 411 Sales Returns and Allowances 412 Sales Discounts 600 Other Income 610 Rent Revenue 611 Interest Revenue 700 Other Expense 710 Interest Expense

  27. NetSolutionsIncome Statement (Multiple-Step)For Year Ended December 31, 2004 Revenue from sales: Sales $ 720,185 Less:Sales returns and allow. $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950 Continued

  28. Operating expenses: Selling expenses: Sales salaries expense $60,030 Advertising expense 10,860 Depr. expense–store equip. 3,100 Miscellaneous selling expense 630 Total selling expenses $ 74,620 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equip. 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. admin. expenses 760 Total admin. expenses 34,890 Total operating expenses 109,510 Income from operations $ 73,440 Continued

  29. Other income: Interest revenue $ 3,800 Rent revenue 600 Total other income $ 4,400 Other expense: Interest expense 2,440 1,960 Net income $75,400

  30. NetSolutionsIncome Statement (Single-Step)For Year Ended December 31, 2004 Revenues: Net sales $708,255 Interest revenue 3,800 Rent revenue 600 Total revenues $712,655 Expenses: Cost of merchandise sold $525,305 Selling expenses 74,620 Administrative expenses 34,890 Interest expense 2,440 Total expenses 637,255 Net income $ 75,400

  31. NetSolutionsBalance SheetDecember 31, 2004 Assets Current assets: Cash $ 52,950 Notes receivable 35,000 Accounts receivable 55,880 Interest receivable 200 Merchandise inventory 62,150 Office supplies 480 Prepaid insurance 2,650 Total current assets $209,310 Continued

  32. NetSolutionsBalance SheetDecember 31, 2004 Assets Property, plant, and equipment: Land $ 20,000 Store equipment $ 27,100 Less accum. depreciation 5,700 21,400 Office equipment $ 15,570 Less accum. depreciation 4,720 10,850 Total property, plant, and equipment 52,250 Total assets $261,560 Continued

  33. NetSolutionsBalance SheetDecember 31, 2004 Liabilities Current liabilities: Accounts payable $ 22,420 Note payable (current portion) 5,000 Salaries payable 1,140 Unearned rent 1,800 Total current liabilities $30,360 Long-term liabilities: Note payable (due 2001) 20,000 Total liabilities $ 50,360 Owner’s Equity Capital stock $ 25,000 Retained earnings 186,200 211,200 Total liabilities and owner’s equity $261,560

  34. Profitability Analysis Profitability is the ability of an entity to earn profits. This ability to earn profits depends on the effectiveness and efficiency of operationsas well as resources available. Profitability analysisfocuses primarily on the relationship between operating results reported in the income statementand resources reported in the balance sheet.

  35. Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets 2003 1992 Net sales $1,498,000 $1,200,000 Total assets: Beginning of year $1,053,000 $1,010,000 End of year 1,044,500 1,053,000 Total $2,097,500 $2,063,000 Average $1,048,750 $1,031,500

  36. Profitability Measures — Effective Use of Assets Ratio of Net Sales to Assets 2003 2002 Net sales $1,498,000 $1,200,000 Total assets: Beginning of year $1,053,000 $1,010,000 End of year 1,044,500 1,053,000 Total $2,097,500 $2,063,000 Average $1,048,750 $1,031,500 Ratio of net sales to assets 1.4 1.2 Use: To assess the effectiveness in the use of assets.

  37. Note: To see the topic slide, type 2 and press Enter. Power Notes ChapterF5 Accounting for Merchandising Businesses This is the last slide in Chapter F5.

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