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Accounting for Merchandising Operations: Assessing Liquidity and Profitability

This chapter explores how to compute the acid-test ratio and gross margin ratio in order to assess liquidity and profitability in merchandising operations.

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Accounting for Merchandising Operations: Assessing Liquidity and Profitability

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  1. Chapter 5 Accounting for Merchandising Operations

  2. 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

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

  4. 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

  5. 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

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

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

  8. 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.

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

  10. 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

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

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

  13. 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

  14. 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

  15. 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

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

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

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

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

  20. Cost of Merchandise Purchased P1

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

  22. 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

  23. 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

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

  25. 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

  26. 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

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

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

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

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

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

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

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

  34. Multiple-Step Income Statement P4

  35. Single-Step Income Statement P4

  36. Balance Sheet P4

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