STUDY OBJECTIVES After studying this chapter, you should understand:

1. CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS STUDY OBJECTIVES After studying this chapter, you should understand:

2. STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY A merchandiser buys and sells goods to earn a profit. Wholesalers/Retailers COGS A service company provides a service to earn a profit. No COGS -

3. INCOME MEASUREMENT MERCHANDISER Less Sales Revenue Equals Cost of Goods Sold Less Gross Profit Equals Net Income (Loss) Operating Expenses

4. Cash Merchandise Inventory OPERATING CYCLE COMPARISON Service Company Receive Cash Perform Services Cash Accounts Receivable Merchandising Company Receive Cash Buy Inventory Sell Inventory Accounts Receivable

5. INVENTORY SYSTEMS PERPETUAL INVENTORY End of period No entry Inventory purchased Item sold SOLD Record purchase Record revenue & COGS PERIODIC INVENTORY Inventory purchased Item sold End of period Compute and record COGS SOLD Record purchase Record revenue only

6. STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY MERCHANDISE INVENTORY CASH Cash purchase COST COST A/P Credit purchase MERCHANDISE INVENTORY COST COST The purchase is normally recorded when the goods are received Credit purchases are normally supported by a purchase invoice

7. 3800 3 800 3800 3800 STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY Cash purchase Credit purchase

8. SHIPPING TERMS – FREE ON BOARD

9. ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 150 150 May 6 Merchandise Inventory Cash (To record payment of freight, terms FOB shipping point) Freight costs are part of the cost of inventory purchased.

10. ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 150 150 May 4 Freight-out (Delivery Expense) Cash (To record payment of freight on goods sold FOB destination) Freight costs incurred by the seller are selling expenses called Freight-out.

11. PURCHASE RETURNS AND ALLOWANCES GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 300 300 May 8 Accounts Payable Merchandise Inventory (To record return of inoperable goods received from Highpoint Electronic, DM No. 126) For purchases returns and allowances, Accounts Payableis debited and Merchandise Inventory is credited. Buyer Seller

12. PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 3,500 3,430 70 May 14 Accounts Payable Cash Merchandise Inventory (To record payment within discount period) If payment is made within the discount period, Merchandise inventoryis credited for the discount taken.

13. PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 3,500 3,500 June 3 Accounts Payable Cash (To record payment with no discount taken) If payment is made after the discount period, Accounts Payableis debited and Cash is credited for the full amount.

14. STUDY OBJECTIVE 3 REVENUE ENTRIES – PERPETUAL INVENTORY Revenues are reported when earned in accordance with the revenue recognition principle. In a merchandising company, revenues are earned when the goods are transferred from seller to buyer. All sales should be supported by a cash register tape (cash sales) or sales invoice (credit sales).

15. REVENUE ENTRIES – PERPETUAL INVENTORY GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 4 Accounts Receivable 3,800 3,800 2,400 2,400 Sales (To record credit sales to Chelsea Video per invoice #731) 4 Cost of Goods Sold Merchandise Inventory (To record cost of merchandise sold on invoice #731 to Chelsea Video) For cash sales, simply replace the debit to accounts receivable with a debit to cash.

16. SALES RETURNS & ALLOWANCES SALES RETURN Customer returns goods to the seller for credit or a refund. SALES ALLOWANCE Seller allows a reduction in selling price. Goods are not returned. Seller prepares a CREDIT MEMORANDUM.

17. GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 8 Sales Returns and Allowances Accounts Receivable (To record credit granted to Beyer Video, for returned goods) 8 Merchandise Inventory Cost of Goods Sold RECORDING SALES RETURNS & ALLOWANCES 300 300 140 140 (To record cost of goods returned ) Sales Returns and Allowances is aCONTRA-REVENUEaccount. It’s normal balance is aDEBIT.

18. SALES DISCOUNTS Seller offers customer a cash discount for prompt payment of balance due. Credit terms indicate the discount percent, Discount period, and final due date. 2/10, n/30 A 2% discount may be taken if payment is made within 10 days of the invoice date. 1/10 EOM A 1% discount is available if payment is made by the 10th of the next month.

19. RECORDING SALES DISCOUNTS GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 3,430 70 3,500 May 14 Cash Sales Discounts Accounts Receivable (To record collection within 2/10, n/30 discount period from Beyer Video) Sales discounts is a CONTRA-REVENUE ACCOUNT. It’s normal balance is aDEBIT.

20. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit (1) Dec. 31 Sales Income Summary (To close income statement accounts with credit balances). COMPLETING THE ACCOUNTING CYCLE Study Objective 4 After all adjustments have been posted, closing entries are prepared from the Income Statement section of the worksheet. All accounts that affect the determination of net income are closed to Income Summary. 480,000 480,000

21. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit (2) Dec. 31 Income Summary Sales Returns and Allowances Sales Discounts Cost of goods sold Store Salaries Expense Rent Expense CLOSING ENTRIES Cost of Goods Sold is closed to Income Summary. 450,000 12,000 8,000 316,000 45,000 19,000 7,000 16,000 17,000 8,000 2,000 Freight - out Advertising Expense Utilities Expense Depreciation Expense Insurance Expense (To close income statement accounts with debit balances)

22. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2002 (3) Dec. 31 Income Summary Retained Earnings (To close net income to retained earnings ) (4) 31 Retained Earnings CLOSING ENTRIES 30,000 30,000 15,000 15,000 Dividends (To close dividends to retained earnings ) After the closing entries are posted, all temporary accounts have zero balances.

23. STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT Illustration 5-6 Computation of Net Sales

24. STUDY OBJECTIVES 5 & 6 MULTIPLE - STEP INCOME STATEMENT The multiple step income statement arrives at net income in stages. Sellers Electronix Income Statement The multiple step income statement also distinguished between operating and non-operating activities.

25. MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES NON-OPERATING ACTIVITIES

26. Sellers Electronix Income Statement For the Year Ended December 31, 2006 Revenues Net sales $ 460,000 Interest revenue 3,000 Gain on sale of equipment 600 Total revenues 463,600 Expe nses Cost of goods sold $ 316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty loss from vandalism SINGLE-STEP INCOME STATEMENT All data are classified under two categories: 1 Revenues 2Expenses Only one step is required in determining net income or net loss. 200 Total expenses 432,000 Net income $ 31,600

27. STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY Sellers Electronix Cost of Goods Sold For the year ended December 31, 2006