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Chapter 4

Chapter 4. Reporting and Analyzing Merchandising Operations. Conceptual Learning Objectives. C1: Describe merchandising activities and identify income components for a merchandising company C2: Identify and explain the inventory asset of a merchandising company

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Chapter 4

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  1. Chapter 4 Reporting and Analyzing Merchandising Operations

  2. Conceptual Learning Objectives C1: Describe merchandising activities and identify income components for a merchandising company C2: Identify and explain the inventory asset of a merchandising company C3: Describe both perpetual and periodic inventory systems C4: Analyze and interpret cost flows and operating activities of a merchandising company

  3. AnalyticalLearning Objectives A1: Compute the acid-test ratio and explain its use to assess liquidity A2: Compute the gross margin ratio and explain its use to assess profitability

  4. Procedural Learning Objectives P1: Analyze and record transactions for merchandise purchases using a perpetual system P2: Analyze and record transactions for merchandise sales using a perpetual system P3: Prepare adjustments and close accounts for a merchandising company P4: Define and prepare multiple-step and single-step income statements P5: Appendix 5A: Record and compare merchandising transactions using both periodic and perpetual inventory systems

  5. Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Expenses Equals Netincome Minus Merchandising Activities C 1 Revenues

  6. Merchandising Activities C 1 Merchandising Companies Manufacturer Wholesaler Retailer Customer

  7. Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores Minus Equals Minus Equals NetSales Reporting Income of a Merchandiser P2 Cost ofGoods Sold GrossProfit Expenses NetIncome

  8. 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 Credit Sale Cash Sale Cashcollection Purchases Purchases Merchandiseinventory Accountreceivable Cashsales Merchandiseinventory Credit sales

  9. Inventory Systems C 3 Beginninginventory Net cost ofpurchases + Merchandiseavailable for sale = Ending inventory Cost of goodssold +

  10. Merchandise Purchases P1 On June 20, Jason, Inc. purchased $14,000 of Merchandise Inventory paying cash.

  11. Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Trade Discounts P1 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.

  12. P1 Seller Invoice datePurchaser Order numberCredit terms Freight termsGoods Invoice amount        

  13. A deduction from the invoice price granted to induce early payment of the amount due. Purchase Discounts P1 Credit Period Discount Period Terms Time Due Due: Full Invoice Price Due: Invoice price minus discount Date of Invoice

  14. 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

  15. On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit terms are 2/10, n/30. Purchase Discounts P1

  16. On May 15, Jason, Inc. paid the amount due on the purchase of May 7. Purchase Discounts P1 *$27,000 × 2% = $540 discount

  17. After we post these entries, the accounts involved look like this: Merchandise Inventory Accounts Payable 5/15 27,000 5/7 27,000 5/7 27,000 5/15 540 Bal. 26,460 Bal. 0 Purchase Discounts P1

  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 When Discount is Not Taken P1 365 days ÷ 20 days × 2% =36.5% annual rate

  19. 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. Purchase Returns and Allowances P1

  20. On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit terms are 2/10, n/30. Purchase Returns and Allowances P1

  21. On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier. Purchase Returns and Allowances P1

  22. On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9. Purchase Returns and Allowances P1

  23. Transportation Costs P1 Buyer Seller FOB destination (seller pays) Merchandise FOB shipping point (buyer pays)

  24. On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid $100 transportation costs. Transportation Costs P1

  25. Quick Check  P1 On July 6, 2007, Seller Co. sold $7,500 of merchandise to Buyer, Co. on account; 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 $7,600 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. Cost of Merchandise Purchased P1

  27. Sales discounts and returns and allowances are Contra Revenueaccounts. Accounting for Merchandise Sales P2

  28. On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was carried in inventory at a cost of $18,000. Sales of Merchandise P2

  29. On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. Let’s prepare the journal entries. Sales Discounts P2

  30. On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale. Sales Discounts P2

  31. On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account. The credit terms were 2/10, n/30. Sales Returns and Allowances P2

  32. On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is related to the June 12 sale. Sales Returns and Allowances P2

  33. On June 20, Barton received the amount owed to it from the sale of June 12. Sales Returns and Allowances P2

  34. C 4 Let’s complete the accounting cycle by preparing the closing entries for Barton.

  35. Step 1: Close Credit Balances in Temporary Accounts to Income Summary. P3

  36. Step 2: Close Debit Balances in Temporary Accounts to Income Summary. P3

  37. Step 3: Close Income Summary to Owner’s Capital P3

  38. Step 4: Close Withdrawals to Owner’s Capital P3

  39. Multiple-Step Single-Step Income Statement Formats P4

  40. Multiple-Step Income Statement P4

  41. Single-Step Income Statement P4

  42. Balance Sheet P4

  43. Acid-Test Ratio Quick Assets Current Liabilities = Cash + S-T Investments + Receivables Current Liabilities Acid-Test Ratio = Acid-Test Ratio A1 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.

  44. 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.

  45. End of Chapter 4

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