Electronic Presentation by Douglas Cloud Pepperdine University

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Survey of Accounting
Electronic Presentation by Douglas Cloud
Pepperdine University
Carl S.Warren
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Task Force Clip Art included in this electronic
presentation is used with the permission of New
Vision Technology of Nepean Ontario, Canada.
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Chapter 4
Accounting for Merchandise Operations
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Learning Objectives
1. Distinguish the operating activities of a
service business from those of a merchandising
business. 2. Describe and illustrate the
financial statements of a merchandising
business. 3. Describe the accounting for the sale
of merchandise. 4. Describe the accounting for
the purchase of merchandise.
After studying this chapter, you should be able
to
Continued
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Learning Objectives
5. Describe the accounting for transportation
costs and sales taxes. 6. Illustrate the dual
nature of merchandising transactions. 7. Describe
the accounting for merchandise shrinkage. 8. Descr
ibe and illustrate the use of gross profit and
operating income in analyzing a companys
operations.
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Learning Objective
1
Distinguish the operating activities of a service
business from those of a merchandising business.
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In prior chapters, you were introduced to how to
report the financial condition and changes in
financial condition for a service business.
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In this chapter, you will be exposed to the
accounting for merchandise operations.
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Home Depot Inc. Condensed Income Statement For
the Year Ending December 28, 2001 (in
millions) Net sales 45,738 Cost of merchandise
sold 32,057 Gross profit 13,681 Operating
expenses 9,490 Operating income
4,191 Other income 26 Income before
taxes 4,217 Income taxes 1,636 Net
income 2,581
Net sales is the revenue received from selling
merchandise less any merchandise returned or any
discounts reported.
The revenue account for merchandise is Sales.
The cost of merchandise sold is matched against
net sales.
Revenue minus cost provides gross profit.
Whats different on a merchandising income
statement?
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Learning Objective
2
Describe and illustrate the financial statements
of a merchandising business.
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Multiple-Step Income Statement
Online Solutions Income Statement For the Year
Ended December 31, 2007
Net sales 708,255 Cost of merchandise sold
525,305 Gross profit 182,950 Operating expenses
105,710 Operating income 77,240 Other income
and expense (net) (1,840) Operating income
before taxes 75,400 Income taxes
15,000 Net income 60,400
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Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales is the total amount the customers are
charged for merchandise sold, including cash
sales and sales on account.
Detailed Revenue Section
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Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales returns and allowances are granted by the
seller for damaged or defective merchandise.
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Multiple-Step Income Statement
Sales 720,185 Less sales returns and
allowances 6,140 Less sales discounts 5,790
11,930 Net sales 708,255
Sales discounts are granted by the seller to
customers for early payment of amounts owed.
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Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
Purchases is the full cost of buying merchandise
for resale.
Detailed Cost of Merchandise Purchased Section
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Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
A Purchase return is the cost of the merchandise
returned to the seller.
A Purchase allowance is a reduction in purchase
price because the item has a defect or was the
wrong item ordered.
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Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
A Purchase discount is a reduction in the
initial cost of the merchandise. Usually, it is
due to early payment of the debt.
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Multiple-Step Income Statement
Purchases 521,980 Less Purchases returns and
allowances 9,100 Purchases discounts
2,525 11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755
Transportation-in is the shipping cost paid by
the buyer for merchandise. Note that this
freight payment increases the cost of the
merchandise. It is not an expense.
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Multiple-Step Income Statement
Cost of merchandise purchased is a major
portion of the cost of merchandise sold section,
which follows the revenue section.
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Multiple-Step Income Statement
Note on the next slide that the only change is
that the section begins by adding the beginning
inventory and ends by subtracting the ending
inventory.
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Multiple-Step Income Statement
Merchandise inventory, Jan. 1, 2007
59,700 Purchases 521,980 Less Pur. returns
and allow. 9,100 Purchases discounts 2,525
11,625 Net purchases 510,355 Add
transportation-in 17,400 Cost of
merchandise purchased 527,755 Merchandise
available for sale 587,455 Less merchandise
inventory, Dec. 31, 2007 62,150 Cost of
merchandise sold 525,305
Detailed Cost of Merchandise Sold Section
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Multiple-Step Income Statement
This income statement was prepared using the
periodic inventory method. The number of units
on hand was determined by a physical count.
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Multiple-Step Income Statement
In contrast, a perpetual inventory system keeps a
running amount for each item as it is bought and
sold. A physical count is still necessary for
verification purposes.
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Single-Step Income Statement
Online Solutions Income Statement For the Year
Ended December 31, 2007
Revenue Net sales 708,255 Expenses Cost of
merchandise sold 525,305 Operating expenses
105,710 Income taxes 15,000 Other income
and expense (net) 1,840 647,855 Net
income 60,400
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Retained Earnings Statement
Online Solutions Retained Earnings Statement For
the Year Ended December 31, 2007
Retained earnings, January 1, 2007 128,800 Net
income for the year 60,400 Less dividends
18,000 Increase in retained earnings
42,400 Retained earning, December 31,
2007 171,200
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Balance Sheet
Online Solutions Balance Sheet December 31, 2007
Assets Current assets Cash
52,950 Accounts receivable 76,080 Merchandise
inventory 62,150 Office supplies 480 Prepaid
insurance 2,650 Total current
assets 194,310
Continued
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Property, plant, and equipment Land
20,000 Store equipment 27,100 less
accumulated depr. 5,700 21,400 Office
equipment 15,570 less accumulated depr.
4,720 10,850 Total property, plant, and
equip. 52,250 Total assets 246,560 Liabil
ities Current liabilities Accounts payable
22,420 Note payable 5,000 Salaries
payable 1,140 Unearned rent 1,800
Total current liabilities 30,360
Continued
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Long-term liabilities Note payable (final
payment due 2017) 20,000 Total
liabilities 50,360 Stockholders
Equity Capital stock 25,000 Retained
earnings 171,200 196,200 Total liabilities
and stockholders equity 246,560
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Statement of Cash Flows
Online Solutions Statement of Cash Flows For the
Year Ended December 31, 2007
Cash flows from operating activities Net
income 60,400 Add Depreciation
expensestore equipment 3,100 Depreciation
expenseoffice equipment 2,490 Decrease in
office supplies 120 Decrease in prepaid
insurance 350 Increase in accounts payable
8,150 14,210
Continued
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Deduct Increase in accounts
receivable (24,080) Increase in merchandise
inventory (2,450) Decrease in salaries
payable (360) Decrease in unearned rent
(600) (27,400) Net cash flow form operating
activities 47,120 Cash flows from investing
activities Purchase of store equipment
(7,100) Purchase of office equipment
(5,570) Net cash flows used in investing
activities (12,670) Cash flows from financing
activities Payment of note payable
(5,000) Payment of dividends (18,000) Net
cash flows used in financing activities
(23,000) Net increase in cash 11,450 January 1,
2007 cash balance 41,500 December 31, 2007
cash balance 52,950
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Learning Objective
3
Describe the accounting for the sale of
merchandise.
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On January 3 Online Solutions sells merchandise
costing 1,200 for 1,800. The customer charges
the purchase on a MasterCard.
Transactions involving MasterCard or Visa are
treated as cash sales.
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Cash sales of 1,800 on January 3 cost of
merchandise sold, 1,200.
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Sales Discounts
Credit Terms
2/10, n/30
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Sales Discounts
On January 12 Online Solutions sells merchandise
on account to Omega Tech for 1,500. Credit
terms are 2/10, n/30.
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Sales Discounts
Payment is received from Omega Tech on January
22.
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Sales Returns and Allowances
On January 13 Online Solutions issues a 2,000
credit memorandum to Krier Company for
merchandise that was returned. The merchandise
(cost 1,200) was sold on account.
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Learning Objective
4
Describe the accounting for the purchase of
merchandise.
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On January 6 Online Solutions purchased 2,500 of
merchandise on account (terms 1/15, n/30).
Recall that Online Solutions uses the perpetual
system.
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Purchase Discounts
On January 21 Online Solutions pays invoice of
1,800, terms 1/15, n/30 within the discount
period.
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Purchase Returns and Allowances
On January 22 Online Solutions returns 5,000 of
merchandise purchased from Quantum Inc.
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Learning Objective
5
Describe the accounting for transportation costs
and sales taxes.
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Transportation Costs
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Transportation Costs
On January 19 Online Solutions buys merchandise
from Data Max on account, 2,900, terms FOB
shipping point, and prepays the transportation
cost of 150.
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Learning Objective
6
Illustrate the dual nature of merchandising
transactions.
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July 1. Scully Company sold merchandise on
account to Burton Co., 7,500, terms FOB
destination 2/10, n/30. The cost of the
merchandise sold was 4,500
Scully Co. (Seller)
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July 1. Scully Company sold merchandise on
account to Burton Co., 7,500, terms FOB
destination 2/10, n/30. The cost of the
merchandise sold was 4,500
Burton Co. (Buyer)
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July 5. Scully Company. paid transportation
charges of 300 on July 1 sale to Burton Co.
Scully Co. (Seller)
Burton Co. (Buyer)
No effect.
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July 6. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
1,000. The merchandise had been purchased by
Burton Co. on account on July 1. The cost of the
merchandise returned was 600.
Scully Co. (Seller)
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July 6. Scully Company issued Burton Co. a
credit memorandum for merchandise returned,
1,000. The merchandise had been purchased by
Burton Co. on account on July 1. The cost of the
merchandise returned was 600.
Burton Co. (Buyer)
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July 11. Scully Company received payment from
Burton Co. for purchase of July 11, less discount
(2 x 6,500).
Scully Co. (Seller)
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July 11. Scully Company received payment from
Burton Co. for purchase of July 11, less discount
(2 x 6,500).
Burton Co. (Buyer)
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Learning Objective
7
Describe the accounting for merchandise shrinkage.
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When a company uses a perpetual inventory, a
physical count is taken at the end of the
accounting period to determine the accuracy of
the perpetual records and to record any inventory
shrinkage.
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Online Solutions inventory records indicate that
63,950 of merchandise should be available for
sale on December 31, 2007. The physical
inventory taken on that date indicates that only
62,150 of merchandise is available for sale.
Inventory shrinkage is 1,800
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Learning Objective
8
Describe and illustrate the use of gross profit
and operating income in analyzing a companys
operations.
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Gross profit and operating income are two
important profitability measures analyst use in
assessing
the efficiency and effectiveness of a
merchandisers operations.
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Gross Profit Percent
Net sales 32,004 Cost of merchandise sold
22,789 Gross profit 9,215 Operating expenses
8,459 Operating income 756
9,2l5
28.8
32,004
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Gross Profit Percent
J. C. Penneys gross profit percentage went from
28.8 to 27.7, then recovered back to 29.8.
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Gross Profit Percent
The recovery in the third year was attributed to
better merchandise assortment, improved inventory
productivity, and centralized buying.
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Operating Income Percent
Net sales 32,004 Cost of merchandise sold
22,789 Gross profit 9,215 Operating expenses
8,459 Operating income 756
756
2.4
32,004
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Operating Income Percent
The companys operating income percentage dropped
from 2.4 to 0.6, then recovered back to 2.7.
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Operating Income Percent
This recovery was attributed to lower catalog and
marketing costs, lower telemarketing costs, and a
shift from development to maintenance of
JCPenney.com.
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Chapter 4
The End
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