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Merchandising Operations

CHAPTER. Merchandising Operations. 5. Differences Between Service and Merchandising Companies. Service enterprises perform services as their primary source of revenue. Merchandising companies buy and sell merchandise. Merchandising Company Revenues and Expenses.

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Merchandising Operations

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  1. CHAPTER Merchandising Operations 5

  2. Differences Between Service and Merchandising Companies Service enterprises perform services as their primary source of revenue Merchandising companies buy and sell merchandise

  3. Merchandising CompanyRevenues and Expenses • Primary source of revenues is the sale of merchandise • Sales revenue • Expenses for a merchandising company are divided into two categories • Cost of goods sold • Operating expenses

  4. Earnings Process Measurement for Merchandiser Illustration 5-1

  5. Inventory Systems • Merchandising entities may use either (or both) of the following inventory systems • Perpetual • Periodic

  6. Inventory Systems • The periodic inventory system is covered in Appendix 5A. • See slides later in this presentation on the periodic system.

  7. Perpetual Inventory • This type of inventory system constantly updates inventory for purchases and sales • When a perpetual system is used, it is still necessary to do a physical count at least once a year to adjust perpetual records to actual • This system is used for many types of products

  8. Cost of Merchandise Inventory • All costs of getting the inventory to the company and ready for sale • Only costs associated with merchandise purchased for resale, not assets acquired for use, such as supplies

  9. Merchandise Purchases On May 4, the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. Merchandise Inventory Accounts Payable May 4 3,800 May 43,800 GENERAL JOURNALDebitCredit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account

  10. Freight Costs—On Incoming Inventory On May 4, the company paid $150 to have the merchandise inventory delivered to them. Merchandise Inventory Freight-Out Cash May 4 3,800 May 4 150 May 4 150 GENERAL JOURNALDebit Credit May 4 Merchandise Inventory 150 Cash 150 To record payment of freight

  11. Freight Costs—On Outgoing Inventory Or, assume that on May 4 the seller paid $150 to have merchandise inventory delivered to the buyer. Merchandise Inventory Freight-Out Cash May 4 3,800 May 4 150 May 4 150 GENERAL JOURNALDebitCredit May 4 Freight-Out 150 Cash 150 To record payment of freight on goods sold

  12. Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. Merchandise Inventory Accounts Payable May 8 300 May 4 3,800 May 8 300 May 4 3,800 May 4 150 GENERAL JOURNALDebitCredit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account

  13. Purchase Discounts • Credit terms specify the amount of cash discount available to encourage early payment and the time period during which it is offered • 2/10, n/30 ( a 2% discount can be taken if the invoice is paid in 10 days, otherwise the total invoice amount is due in 30 days)

  14. Purchase Discounts Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period.

  15. Purchase Discounts Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. Merchandise Inventory Accounts Payable Cash May 143,430 May 8 300 May 4 3,800 May 8 300 May 4 3,800 May 143,500 May 4 150 May 14 70 GENERAL JOURNALDebitCredit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period

  16. Sales Revenue—Perpetual System • Recorded when earned • Revenue recognition principle • Two entries are made for each sale • To record sale • To record cost of merchandise sold

  17. Accounts Receivable Merchandise Inventory Cash Sales Returns & Allowances Cost of Goods Sold Sales Sales Assume a cash sale of $2,200 for merchandise that cost $1,400 May 4 2,200 May 4 1,400 May 4 1,400 May 4 2,200

  18. Accounts Receivable Merchandise Inventory Cash Sales Returns & Allowances Cost of Goods Sold Sales Sales Assume a sale of $3,800 on account for merchandise that cost $2,400 May 4 3,800 May 4 2,400 May 4 2,400 May 4 3,800

  19. Sales Returns and Allowances • Contra revenue account to sales • Separate account used contrary to purchase returns and allowances • Used to show how much came in on returns and allowances • Excessive returns and allowances suggest • Errors in billing customers • Mistakes in delivery or shipment of goods

  20. Sales Returns and Allowances Flip side of purchase returns and allowance EXCEPT two entries are required: one to record return (at sale price) and one to restore goods to inventory, assuming goods resaleable (at cost) On seller’s books GENERAL JOURNALDebit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stereo Merchandise Inventory 140 Cost of Goods Sold 140 To restore returns to inventory

  21. Sales Discounts • Contra revenue accountto sales • Separate account used contrary to purchase discounts • Used to disclose amount of cash discounts taken by customers

  22. Sales Discounts

  23. Two Forms ofStatements of Earnings • Single-step statement of earnings • Multiple-step statement of earnings

  24. Single-Step Statement of Earnings

  25. PW AUDIO SUPPLY, INC.Single-StepStatement of EarningsYear Ended December 31, 2004

  26. PW AUDIO SUPPLY, INC.Multiple-StepStatement of EarningsYear Ended December 31, 2004

  27. PW AUDIO SUPPLY, INC.Multiple-StepStatement of EarningsYear Ended December 31, 2004

  28. Evaluating Profitability • Gross profit margin • Profit margin

  29. Gross Profit Margin Gross Profit Margin = Gross Profit Net Sales Company’s gross profit expressed as a percentage

  30. Profit Margin Profit Margin = Net Earnings Net Sales

  31. Appendix 5A: Periodic System • Merchandising entities may use either (or both) of the following inventory systems • Perpetual • Periodic

  32. Periodic System • This type of inventory system does not keep an updated record of all goods bought, sold and on hand • In a periodic system, inventory is only counted once a year • This system is mostly used for inexpensive products

  33. Sales Revenues—Periodic System • Record when earned - revenue recognition principle • Only ONE entry is made for each sale in a periodic inventory system • NONE to record cost of goods sold as in a perpetual inventory system

  34. Accounts Receivable Merchandise Inventory Cash Sales Returns & Allowances Cost of Goods Sold Sales Sales Assume a sale of $3,800 on account X May 4 3,800 X May 4 3,800

  35. Purchase of Merchandise • Perpetual inventory system • Merchandise Inventory-one account used to accumulate the cost of goods purchased • Periodic inventory system • Separate accounts used to accumulate the cost of goods purchased

  36. Normal BalancesCost of Goods Purchased Accounts

  37. Net Purchases Net purchases are gross purchases adjusted for returns and discounts

  38. Cost of Goods Purchased Cost of goods purchasedis net purchases plus freight-in

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