Accounting for Merchandising Operations

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Chapter 5

• Accounting for Merchandising Operations

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In Chapter 4

• You learned how to
• Prepare Adjusting Entries
• Prepare Closing Entries
• Use the Adjusted Balances to prepare Financial
  Statements
• Complete the Accounting Cycle

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Accrual Basis Accounting

• Revenue recorded only when earned not when cash
  is received
• Expense recorded only when incurred not when
  cash paidin the period in which the company
  benefited from it

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Accrual Basis adheres to...

• Generally
• Accepted
• Accounting
• Principles

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Adjusting Entries

• Adjusting entries make the
• revenue recognition
• matching principles
  

HAPPEN!
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Still confused?

• Do we need another way to learn this concept?

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Revenue Recognition a rap

• If you wanna be accrual
• Heres what you gotta do,
• When the service is performed
• You book the Revenue!

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In Chapter 5

• You will learn
• How Merchandise is Acquired and Sold
• How Inventory Purchases and Sales are recorded in
  a firms accounting records using Perpetual
  Inventory system
• How to prepare Financial Statements that are
  meaningful for a merchandising operation
• Appendix Periodic inventory system

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Merchandising Operations
Buy Merchandise to Sell to their Customers
Wholesalers sell their merchandise to Retailers
2 Categories
Retailers Sell their merchandise directly to the
final consumer
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Target is a Retailer
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The Operating Cycle for a Merchandiser
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In Chapter 2, we discussed the Historical Cost
Principle
Assets are recorded on the Balance Sheet at
cost Cost includes all costs necessary to get the
asset ready for its intended purpose
5,000
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The Historical Cost Principle also applies to
Inventory

• Inventory is a Current Asset
• It is recorded on the Balance Sheet at Historical
  Cost
• Cost includes all costs necessary to get the
  inventory ready for its intended purpose
• Lets look at the cost components for Inventory..

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Lets assume a Perpetual Inventory System

• A Perpetual Inventory system records all changes
  in the value of Inventory directly in the
  Inventory Account.

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This example begins on page 229 in your text.
On June 1, 20X6, Quality Lawn Mowers purchases
100 lawn mowers for 150 each on account from
Black Decker.
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Heres the invoice..
This is the Invoice Date
This information is needed to record the purchase
of inventory
This is the Invoice Amount
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The journal entry to record the purchase of
inventory.
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The Purchase of Inventory is restricted to the
Balance Sheet
Assume the Initial Investment by shareholders was
100,000 cash.
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Goods in Transit

• These are goods on board a truck, train, ship,
  or plane at the end of the period.

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Goods in Transit

• Who includes these in inventory?
• Buyer?
• Seller?

The Company with Legal Title
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Shipping Terms

• FOB (free on board) shipping point- ownership of
  goods passes to buyer when public carrier accepts
  the goods
• FOB (free on board) destination- ownership of
  goods remains with the seller until the goods
  reach the buyer

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Ownership passes to owner here
Illustration 6-4
FOB Shipping Point
Public Carrier Co
Seller
Buyer
Ownership passes to buyer here
FOB Destination Point
Public Carrier Co
Seller
Buyer
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Freight Costs Memory Jog
Incoming Freight is added to Inventory
IN
As it Exits, Its an Expense!
EX
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Back to the invoice..
Goods were purchased FOB Shipping Point
Title transferred to Quality Lawn Mowers at the
time the units were shipped.
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The journal entry to record the incoming freight
charge
Incoming Freight is Charged to Inventory
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When Inventory is purchased FOB Shipping Point,
the Freight Cost is added to Inventory
Assume the Initial Investment by shareholders was
100,000 cash.
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Purchase Returns and Allowances
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Purchase Returns and Allowances reduce the cost
of the Inventory and the amount owed to the vendor
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Purchase Discounts
If paid within 10 days of invoice
Are Discounts for Early Payment
Otherwise, total is due within 30 days
2/10 net 30
Take a 2 discount
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Payment Terms

• Are included on the Invoice
• To encourage prompt payment

Take a 1 discount if paid within 10 days,
otherwise entire balance is due in 30 days.
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Purchase Discounts
Balance Owed 14,700
14,700 1 147
14,700 minus 147 14,553
Notice that the Payable Balance is now 0
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Notice that the Cost of the Inventory equals the
sum of the cash payments.
14,896
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Inventory T account
14,896 98 units 152 per mower
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All transactions related to the Acquisition of
inventory have been restricted to the Balance
Sheet
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As Assets are consumed, they are recorded as
expenses on the Income Statement.
Income Statement
Balance Sheet
Supplies
Supplies Expense
Insurance Expense
Prepaid Insurance
Rent Expense
Prepaid Rent
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As Inventory is consumed, it is expensed as Cost
of Goods Sold.
So as Inventory is consumed
It is subtracted on the Multiple-Step Income
Statement
It will be recorded as Inventory Expense?
Whats a Multiple Step Income Statement?!!
Yes, but the Expense is called Cost of Goods
Sold
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Why is it called a Multiple-Step Income Statement?

• Because rather than taking total revenues and
  subtracting total expenses in a single step
• We Step our way down to Net Income
• Revenues
• Subtract Something and
• Calculate a subtotal
• Subtract something else,
• Calculate another subtotal, etc.
• Each subtotal will provide important information.
  

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Multiple-Step Income Statement

• Net Sales
• - Cost of Goods Sold
• Gross Profit
• - Operating Expenses
• Income from Operations
• - Other Expenses
• Other Revenues
• Net Income

? Amount Customer pays for the goods
? Amount the Company paid for the goods
? This is our markup!
? Selling, General and Administrative Expenses
? Profitability of our Core Business
? Profitability of Peripheral Activities
? Transferred to Statement of Retained Earnings
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Yikes! Thats a lot to remember!
No Chance.Im a GONER!
Time for another JOG!
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Multiple Step Income Statement Memory Jog NC
GONER!
Net Sales - Cost of Goods Sold Gross Profit -
Operating Expenses Net Operating Income -
Other Expenses Other Revenues Net Income
N
C
G
O
N
E
R
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A Scanner System is a perpetual inventory system
This allows for an instantaneous match of
revenues and expenses
Every time an item is scanned
2) The inventory database is updated
1) The Sale is Recorded
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Journal Entries for Sales in a Perpetual
Inventory System
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Simultaneously, the cost of the units are removed
from Inventory.
14,896 98 units 152 per mower
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Reporting Sales and Cost of Goods Sold
Each mower sold for 400.
Each unit cost 152.
Thats a 248 markup per unit.
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But our customer isnt completely happy.
Sales Returns and Allowances is a contra-revenue
account.
Its purpose is to reduce sales, and provide more
detailed information on the Income Statement.
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Reporting Sales Returns and Allowances
Sales Returns and Allowances is subtracted from
Sales
In the Calculation of Net Sales
They reduced the price by 100 to make me happy!
It allows the reader to know how content the
customers are with the product.
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We offered our customer payment terms of 2/10 net
30 to encourage prompt payment
3,900 - 78 3,822
3,900 2 78
Receivable Balance 3,900
Notice that the Receivable Balance is now 0
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Reporting Sales Discounts
Sales Discounts is subtracted from Sales
In the Calculation of Net Sales
Paying early saved me 78. I paid 3,822 for the
mowers
It allows the reader to know how many customers
took advantage of the early payment incentives
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Merchandisers generate revenue by delivering
goods to their customers.
The detail provided on a multiple-step income
statement
Allows the reader to assess how successful they
are in achieving that goal.
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Appendix PERIODIC INV.
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Perpetual Inventory System

• Continuous perpetual accounting records are
  kept to track the Sales transaction AND the Cost
  of the Goods Sold.
• ?Better tracking of item availability, on hand,
  on order
• 2 journal entries for a sale

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Periodic Inventory System

• No tracking
• Inventory just counted periodically to see what
  is on hand.
• 1 journal entry for sale

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Sales Revenues - Under a Periodic System

• ONLY 1 entry is made for each sale
• one to record sale

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Key difference between periodic and perpetual
inventory
is the point at which the costs of goods
sold is computed.
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No attempt is made on date of sale to record the
cost of merchandise sold...
Periodic Inventory
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Companies that use periodic inventory take a
physical count to...

• determine ending inventory
• compute cost of goods sold

Companies that use perpetual inventory must
take a physical inventory to check accuracy of
book inventory to actual inventory.
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• Example Perpetual vs. Periodic

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End Chapter 5
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Shipping Terms FOB Shipping Point
Title transfers to BUYER at the time the goods
are shipped
Buyer Owns the goods in transit Freight Costs
are paid by the BUYER
This increases the cost of the goods purchased.
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Shipping Terms FOB Shipping Point
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Shipping Terms FOB Destination
Title Changes at the time the goods reach their
destination
Seller owns the goods in transit Freight costs
are paid by the SELLER
The freight cost is recorded as an operating
expense by the seller
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Shipping Terms FOB Destination