Accounting for

1
Chapter 5

• Accounting for
• Merchandising Operations

2
Merchandising Activities
C 1

• Service organizations sell time to earn
  revenue.
• Examples Accounting firms, law firms and
  plumbing services

Revenues
3
Merchandising Activities
C 1
Merchandising Companies
Manufacturer
Wholesaler
Retailer
Customer
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Reporting Income of a Merchandiser
P2

• Merchandising companies sell products to
  earn revenue.
• Examples sporting goods, clothing, and auto
  parts stores

Cost ofGoods Sold
GrossProfit
Expenses
NetIncome
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Operating Cycle for a Merchandiser
C 2

• Begins with the purchase of merchandise and
  ends with the collection of cash from the sale of
  merchandise.

Credit Sale
Cash Sale
Cashcollection
Purchases
Purchases
Merchandiseinventory
Accountreceivable
Cashsales
Merchandiseinventory
Credit sales
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Inventory Systems
C 3
Beginninginventory
Net cost ofpurchases

Merchandiseavailable for sale

Ending inventory
Cost of goodssold

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

• Used by manufacturers and wholesalers to
  offer better prices for greater quantities
  purchased.

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.
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P1
?Seller ?Invoice date ?Purchaser ?Order
number?Credit terms ?Freight terms?Goods ?Invoi
ce amount
?
?
?
?
?
?
?
?
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Purchase Discounts
P1

• A deduction from the invoice price granted to
  induce early payment of the amount due.

Credit Period
Discount Period
Terms Time Due
Due Full Invoice Price
Due Invoice price minus discount
Date of Invoice
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Purchase Discounts
P1
2/10,n/30
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Purchase Discounts
P1

• On May 7, Jason, Inc. purchased 27,000 of
  merchandise inventory on account, credit terms
  are 2/10, n/30.

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Purchase Discounts
P1

• On May 15, Jason, Inc. paid the amount due on
  the purchase of May 7.

27,000 2 540 discount
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Purchase Discounts
P1

• After we post these entries, the accounts
  involved look like this

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When Discount is Not Taken
P1

• If we fail to take a 2/10, n/30 discount,
  is it really expensive?

365 days 20 days 2 36.5 annual rate
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Purchase Returns and Allowances
P1

• 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.

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Purchase Returns and Allowances
P1

• On May 9, Matrix, Inc. purchased 20,000 of
  merchandise inventory on account, credit terms
  are 2/10, n/30.

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Purchase Returns and Allowances
P1

• On May 10, Matrix, Inc. returned 500 of
  defective merchandise to the supplier.

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Purchase Returns and Allowances
P1

• On May 18, Matrix, Inc. paid the amount owed
  for the purchase of May 9.

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

• On May 12, Jason, Inc. purchased 8,000 of
  merchandise inventory for cash and also paid 100
  transportation costs.

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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 Buyers 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.
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Cost of Merchandise Purchased
P1
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Accounting for Merchandise Sales
P2
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Sales of Merchandise
P2

• On March 18, Diamond Store sold 25,000 of
  merchandise on account. The merchandise was
  carried in inventory at a cost of 18,000.

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Sales Discounts
P2

• On June 8, Barton Co. sold merchandise
  costing 3,500 for 6,000 on account. Credit
  terms were 2/10, n/30. Lets prepare the journal
  entries.

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Sales Discounts
P2

• On June 17, Barton Co. received a check for
  5,880 in full payment of the June 8 sale.

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Sales Returns and Allowances
P2

• On June 12, Barton Co. sold merchandise
  costing 4,000 for 7,500 on account. The credit
  terms were 2/10, n/30.

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Sales Returns and Allowances
P2

• 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.

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Sales Returns and Allowances
P2

• On June 20, Barton received the amount owed
  to it from the sale of June 12.

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Lets complete the accounting cycle by preparing
the closing entries for Barton.
C 4
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Step 1 Close Credit Balances in Temporary
Accounts to Income Summary.
P3
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Step 2 Close Debit Balances in Temporary
Accounts to Income Summary.
P3
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Step 3 Close Income Summary to Owners Capital
P3
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Step 4 Close Withdrawals to Owners Capital
P3
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Income Statement Formats
P4

• Multiple-Step
• Single-Step

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Multiple-Step Income Statement
P4
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Single-Step Income Statement
P4
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Balance Sheet
P4
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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.
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Gross Margin Ratio
A2
Percentage of dollar sales available to cover
expenses and provide a profit.
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Hints

• Purchaser
• Merchandise inventory Returns ?
• Allowances ?
• Discounts ?
• Transportation ?
• Accounts Payable

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Homework

• Read Chapter 5
• Read and answer the Decision Maker and Decision
  Ethics questions
• Read and answer the Quick Checks
• Visit the Publishers website tools for Ch 5
• Key Terms p. 204 (glossary on web)
• Multiple Choice Quiz p. 205
• Discussion Questions p. 205
• P 5-1A p. 210