Merchandising Firms

1
Merchandising Firms
2
2
Account For Purchase Sale Of Inventory
OBJ
From this Point On, Inventory will Refer to the
Goods that a Firm Buys at Wholesale and Resells
at Retail
There are three major players
Supplier/Vendor
Customer
Businesses - Us
There are two major movements
B. Money
A. Physical Goods/Inventory
3
Purchase of Inventory Example
186
2a
Account For Purchase Of Inventory
OBJ
On May 1, Ag Products paid cash for 2,000 of
various items for resale.

• May 1

Inventory 2,000
Cash 2,000
Purchased inventory for cash
Inventory
Cash
2,000
2,000
4
Purchase of Inventory Example
186
2a
Account For Purchase Of Inventory
OBJ
On May 2, Ag Products acquired on account 2,000
of various items for resale.

• May 2

Inventory 2,000
Accounts Payable -XYZ 2,000
Purchased inventory on account
Inventory
Accounts Payable
2,000
2,000
5
Recording A Purchase Returns
188
2a
Account For Purchase Of Inventory
OBJ

• On May 4, Ag Products returned a 100 item and
  received a cash refund.

May 4
Cash - XYZ 100
Inventory 100
Merchandise was returned
6
Recording A Purchase Returns Example
188
2a
Account For Purchase Of Inventory
OBJ

• On May 4, Ag Products returned a 100 item prior
  to payment of the invoice.

May 4
Accounts Payable - XYZ 100
Inventory 100
Merchandise was returned
7
Recording Purchase Allowance
188
2a
Account For Purchase Of Inventory
OBJ

• Assume other merchandise is slightly damaged, and
  Ag Products was given a 10 allowance.

May 5 Accounts Payable -XYZ 10
Inventory 10
Accounts Payable
Inventory
2,000 100 10
100 2,000 10
Bal. 1,890
Bal. 1,890
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Freight Charges Example
189
2a
Account For Purchase Of Inventory
OBJ

• Ag Products had a 60 FOB Ship Pt freight bill
• What is the journal entry?

Paid Cash for Freight
Charged Freight Bill
May 9 Inventory 60 Cash
60 Paid a freight bill
May 9 Inventory 60 Acct Payable-UPS 60

May ? Acct Payable-UPS 60 Cash
60
9
Purchase Discounts Example
187
2a
Account For Purchase Of Inventory
OBJ

• Assume Ag Products purchased merchandise for
  1,000 with terms of 2/10, N/30.
• Ag Products paid within the discount period.
• The 2 discount (20) is deducted from the amount
  due (1,000) and 980 is remitted.

Accounts Payable- XYZ 1,000 Cash
980 Inventory
20 To record invoice payment within discount
period
10
Inventory Purchase Transactions
190
2a
Account For Purchase Of Inventory
OBJ
Inventory
Debit
Credit
Decrease
Increase
Wholesale Cost Of Goods
Purchase Returns
Purchase Allowances
Freight In
Purchase Discounts
11
On May 11, Ag Products sold merchandise costing
1,800 for 2,600 cash.
191
2b
Account For Sale Of Inventory
OBJ
May 11 Cash 2,600 Sales Revenue
2,600 To record cash sale of merchandise
May 11 Cost of Gds Sold (Whlse Exp)
1,800 Inventory (Curr Asset)
1,800 To record the cost of merchandise sold
12
191
2b
Account For Sale Of Inventory
OBJ
On May 15, Ag Products sold Mary merchandise
worth 5,000 with a 3,000 cost. Terms2/10, N/30
May 15 Accounts Rec - Mary 5,000 Sales
Revenue 5,000 To record sale of
merchandise on acct
May 15 Cost of Gds Sold (Whlse Exp)
3,000 Inventory (Curr Asset)
3,000 To record the cost of merchandise sold
13
On Account Sale Return
192
2b
Account For Sale Of Inventory
OBJ
On May 17, Mary returned 1,500 worth of goods
bought on account that cost 900.
May 17 Sales Returns and Allowance
1,500 Accounts Receivable - Mary 1,500 Recei
ved returned merchandise
May 17 Inventory
900 Cost of Goods Sold 900 Returned
goods to inventory
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Cash Sale Return
192
2b
Account For Sale Of Inventory
OBJ
On May 18, Jane returned 1,300 worth of goods
bought with cash that cost 900.
May 18 Sales Returns and Allowance
1,300 Cash to Jane
1,300 Received returned merchandise
May 18 Inventory
800 Cost of Goods Sold 800 Returned
goods to inventory
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Cash Sale Return w/ Store Credit
192
2b
Account For Sale Of Inventory
OBJ
On May 19, Judy returned 150 worth of goods
bought with cash that cost 90 for store credit.
May 19 Sales Returns and Allowance
150 Accounts Payable to Judy
150 Received returned merchandise
May 19 Inventory
90 Cost of Goods Sold 90 Returned
goods to inventory
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Sales Allowances Example
193
2b
Account For Sale Of Inventory
OBJ
A credit of 100 was allowed to Mary for
merchandise that was damaged
May 17 Sales Returns Allowance 100 Accounts
Receivable - Mary 100 Credit granted for
damaged goods

• There is no entry required for inventory since
  the goods were not returned.

17
Sales Discounts
193
2b
Account For Sale Of Inventory
OBJ

• Mary took advantage of the sales terms 2/10,
  N/30.

May 20 Cash
3,332 Sales Discounts
68 Accounts Receivable - Mary
3,400 Cash collected within the discount period
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Inventory Sale Transactions
190
2b
Account For Sale Of Inventory
OBJ
Inventory
Retail Sales
Sales Returns
Sales Returns Allowances
Sales Allowances
Sales Returns
Sales Discount
Sales Discount
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Adjust Close Accounts Of Merchandising Business
199
3
OBJ

• Adjusting Entries- I. Pre-Pd/Deferrals

• MERCHANDISE FIRM

A. Pre-Pd Exp
Rent Exp 500 Pre-Pd Rent 500
B. Accrued Revenues
Acct Rec 600 Sales Rev 600
C. Depreciation
Deprec Exp 400 Accum Dep 400
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Adjust Close Accounts Of Merchandising Business
199
3
OBJ

• Adjusting Entries- II. Accruals

• MERCHANDISE FIRM

D. Accrued Exp
Wage Exp 900 Wages Pay 900
E. Unearned Rev
Unearn Sales Rev 60 Sales Revenue 60
F. Missing Merchandise
COGS 800 Inventory 800
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Adjust Close Accounts Of Merchandising Business
199
3
OBJ
Closing Entries

• MERCHANDISE FIRM

• Step 1 Close Rev Accts to Income Summary

Sales Revenue 5000 Income Summary
5000
Income Summary
Sales Revenues
5000 (Rev-Adj)
5000 (NB)
(Rev Adj) 5000
22
Adjust Close Accounts Of Merchandising Business
199
3
OBJ
Closing Entries

• MERCHANDISE FIRM

• Step 2 Close Exp Accts to Income Summary

Supplies Expense
Utilities Expense
Sales Discount
Income Sum 3000
Sales Ret Allow
Exp Acct 300
Cost of Gds Sold
Exp Acct xxx
Exp Acct xxx
Income Summary
Expense Accts
(Exp Adj) 3000
5000 (Rev-Adj)
NB
300 (Exp Adj)
23
Adjust Close Accounts Of Merchandising Business
199
3
OBJ
Closing Entries

• MERCHANDISE FIRM

• Step 3 Close Income Summary to Capital(Move
  Profits from Inc Sum to Capital)

Income Sum 2000
Capital 2000
Income Summary
Capital
3000 (BC)
5000 (Rev-Adj)
(Exp Adj) 3000
2000 (NI Adj)
(NI Adj) 2000
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Adjust Close Accounts Of Merchandising Business
199
3
OBJ
Closing Entries

• MERCHANDISE FIRM

• Step 4 Close Withdraw to Capital

Capital 1000
Withdraw 1000
Withdraw
1000
1000
Income Summary
Capital
(WD) 1000
5000 (Rev-Adj)
(Exp Adj) 3000
3000 (BC)
2000 (NI Adj)
(NI Adj) 2000
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Multi-Step Format
Prepare A Merchandisers Financial Statements.
201
4
OBJ
Sporting Store Income Statement Year Ended
December 31, 2002
Sales revenue 2,760,000 Less Sales
discounts 22,824 Ret
allowances 32,605 Net sales
revenue 2,704,571 Cost of goods sold
1,490,400 Gross margin/profit 1,214,171
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Multi-Step Format
Prepare A Merchandisers Financial Statements.
201
4
OBJ
Gross margin 1,214,171 Operating
expenses Wage expense 166,285 Rent
expense 137,000 Insurance
expense 16,302 Depreciation
expense 9,781 Supplies
expense 8,151 Total Operating
Exp 337,519 Operating income
876,652
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Multi-Step Format
Prepare A Merchandisers Financial Statements.
182
4
OBJ
Operating income 876,652 Other revenue
and expenses Interest revenue
7,348 Interest expense 1,000 Total
other revenue 6,348 Net
income 883,000
Advantage Separates Operational Profits from
Profits resulting from other Operations
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The Classified Balance Sheet
201
4
Classify Assets Liabilities
OBJ
Balance Sheet XYZ Merchandiser As of January 31,
20XX
Assets

Liabilities Current assets
Current
liabilities Cash 12,100 Accounts
payable 1,200 Accounts
receivable 3,050 Salary payable
1,100 INVENTORY 75 Unearned
revenue 1,500 Supplies 75
Total current assets 15,300
Total liabilities 3,800 Plant assets
Long Term Liabilities Equipment 15,500
Owners equity Less Accum. deprec.
(7,700) 7,800 Capital 19,300

Total liabilities and Total
assets 23,100 owners equity 23,100
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Apply Inventory Costing Methods

• There are 4 Inventory Costing Methods to
  determine the value of inventory when costs are
  changing
• Specific Unit Cost
• Average Cost
• First-in, first-out (FIFO)
• Last-in, first-out (LIFO)

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Computing the Cost of Inventory
Apply Inventory Costing Methods
249
1a
OBJ
Cost of inventory on hand Quantity unit cost
Four Inventory Costing Methods
1. Specific Unit Cost
a. Used where each item has a different cost
b. Auto, jewelry, furniture, real estate
c. Used by very few companies
31
Acct for inventory by the perpetual system
249
1a
OBJ
Four Inventory Costing Methods
2. Average Cost
a. COGS is based on avg cost for the period
b. Compute new avg cost after each purchase
c. Generates gross profits, income tax, and net
income amount between the extremes of FIFO LIFO
d. Middle ground approach
32
Acct for inventory by the perpetual system
249
1a
OBJ
Four Inventory Costing Methods
3. First In First Out
a. Ending Inventory based most recent purchases
b. First Items In are the first to be sold
c. COGS based oldest purchases
d. Consistent with physical movement of Inventory
for most companies.
d. Produces lowest COGS and highest profit
attract investors borrow on good terms
33
Acct for inventory by the perpetual system
252
1a
OBJ
Four Inventory Costing Methods
4. Last In First Out
1. Last Items In are the first to be sold
2. COGS based most recent purchases
3. Ending Inventory based earliest purchases
4. Results in highest COGS and lowest net profit

5. Lower net profits means less income tax but is
not attractive to investors or bankers
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Comparison of Methods
Apply inventory costing methods
254
2
OBJ
When Prices are Increasing
FIFO
Wtd Ave
LIFO
Lowest End Invent
Highest End Invent
Middle
Highest COGS
Lowest COGS
Middle
Lowest Gross Profits
Highest Gross Profits
Middle
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Special Journals in a Perpetual Inv Sys
CH 7 SPEC JRNLS PART 1 REVIEW

• Special Journals are accounting journals used to
  record one specific type of transaction.

Only for For Merch Sales on Acct
Sales
Db Accts Rec, Cr Sales Revenue
For Cash In for any purpose
Cash Receipts
All Transactions that Db Cash
Only for For Purchases on Acct
Purchases
All Transactions that Cr Accts Pay
Cash Disbursements
Cash Out for any purpose
All Transactions that Cr Cash
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CHAPTER 7 SPECIAL JOURNALS
I. Sales Journal A. Daily 1. Record Sales
2. Post in Ind Accts in AR Sub
Ledger B. End of Month 1. Post Db to Act
Rec in Gen Ledger 2.
Post Cr to Sales Rev in Gen Ledger
3. Post Db to COGS in Gen Ledger
4. Post Cr to Inventory in Gen
Ledger
I. Cash Receipts Journal A. Daily 1.
Record Money Reced 2. Post in Ind Accts
in Acct Rec Sub Ledger B. EOM Post to
Gen Ledger 1. Post Db to Cash 2. Post Db
to Sales Dis 3. Post Cr to Acct Rec 4.
Post Cr to Sales Rev 5. Post Db to COGS
6. Post Cr to Inventory
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CHAPTER 7 SPECIAL JOURNALS
I. Purchases Journal A. Daily 1. Record
Purchases 2. Post in Ind Accts
in AP Sub Ledger B. End of Month 1. Post
Cr to Act Payable in Gen Ledger
2. Post Db to Inventory in Gen
Ledger 3. Post Db to Supplies in
Gen Ledger 4. Post Db to Other Accts
in Gen Ledger
I. Cash Payments Journal A. Daily 1.
Record Money Paid 2. Post in Ind Accts
in Acct Pay Sub Ledger B. EOM Post to
Gen Ledger 1. Post Db to Acct Payable 2.
Post Db to Other Accts 3. Post Cr to Cash
4. Post Cr to Inventory
38
General Journal
Use purc jrnl, cash disburs jrnl, accts payable
sub ledger.
242
3
OBJ

• Special journals save much time in recording
  repetitive transactions posting to the ledger.

However, some transactions do not fit into any of
the special journals and go in the gen journal

• Depreciation
• Purchase returns and allowances
• Sales returns and allowances
• Adjusting and closing entries
• Misc entries

39
Balancing the Ledgers
Use purc jrnl, cash disburs jrnl, accts payable
sub ledger.
246
3
OBJ

• At the end of the accounting period
• 1. Total debits and credits of account balances
  in the general ledger are equal.
• 2. Control account balances are equal to the sum
  of the appropriate subsidiary ledger accounts.

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Looking Ahead

• Midterm 2, Thursday
• Chapters 5 - 7
• Mostly problems, some objective questions