ACTG 2110

1
ACTG 2110

• Chapter 6 Accounting for Merchandising
  Businesses

2
Merchandising Companies

• Businesses that buy goods with the intention of
  reselling the goods at a higher price
• Ex. Target, WalMart, Dillards, Krogers,
  Books-a-Million, Old Navy, Sears, Etc.
• Two new accounts
• Inventory merchandise to be resold
• Listed as a current asset on the balance sheet
• Cost of goods sold merchandise that has been
  sold
• Expensed on the income statement
• Generally a large expense (often the largest)

3
Operating cycle

• CashgtgtgtgtgtBuy inventorygtgtgtgtgtgtgtSell
  inventorygtgtgtgtgtgtgtgtgtCollect cash from customers or
  the accounts receivable collections
• Shorter the operating cycle, the better off you
  are (get cash back fast!!!)

4
Multi-step Income Statement

• Net sales (Sales sales returns and allowances
  sales discounts)
• Less cost of goods sold
• Gross profit margin
• Operating expenses
• Selling expenses
• General Administrative expenses
• Income from operations (Operating income)
• Add other income (interest income)
• Subtract other expenses (interest expense)
• Net income

5
Other Financial Statements

• Single-step income statement
• All revenues listed together (no other income)
• All expenses listed together (no gross profit
  margin or other expenses)
• Statement of owners equity
• Same as for service businesses
• Balance sheet
• Now includes inventory as a current asset

6
Inventory Systems

• Perpetual
• Inventory account continuously updated
• Inventory is counted at the end of the period to
  see whether it agrees with accounting records
• All purchases increase Inventory
• Cost of goods sold is recorded every time a sale
  occurs

• Periodic
• Inventory account only updated occasionally or
  periodically
• Inventory is counted at end of the period
• All purchases go to an expense account entitled
  Purchases
• Cost of goods sold is backed into

7
Accounting for Inventory Perpetual System

• Sales of Inventory (2 entries)
• Cost of goods sold XXX
• Inventory XXX
• Accts. Rec./Cash XXX
• Sales XXX
• Sales Discounts
• Cash XXX
• Sales Discounts XXX
• Accounts Receivable XXX
• Sales Returns and Allowances
• Sales Returns and Allowances XXX
• Accounts Receivable/Cash XXX

8
Accounting for Inventory Perpetual System

• Purchases of inventory
• Inventory XXX
• Accounts Payable XXX
• Purchases Discounts
• Payment terms 2/10, n/30
• 2 discount if paid in 10 days, net must be paid
  by 30 days
• Gross method (purchases discounts reduce the
  inventory amounts)
• Net method (purchase recorded at the amount after
  the discount if discount not taken, inventory is
  increased)

9
Accounting for Inventory Perpetual System

• Purchases returns and allowances
• Recorded as decreases in inventory
• Transportation Costs
• Freight in (Added to inventory cost)
• FOB Shipping point
• Buyer generally pays freight
• Buyer owns inventory when it reaches the
  shipping point
• FOB Destination
• Seller generally pays freight
• Seller owns inventory until it reaches the buyer
  or the destination
• Freight out/Delivery expense (Selling/marketing
  cost to deliver goods)

10
Sales Taxes

• Example
• Cash/Accts. Rec. 1,060
• Sales 1,000
• Sales Tax Payable 60
• (1,000 sale 6 sales tax collected)
• Sales Tax Payable 60
• Cash 60
• (Business pays sales tax to state)

11
Adjusting Entries

• Adjust for inventory shrinkage
• Example Inventory records show 1,000, while
  inventory count shows 950
• Cost of goods sold 50
• Inventory 50

12
Financial Analysis and Interpretation

• Ratio of net sales to assets (Asset turnover)
• Net sales/Average assets
• Represents how effective a business uses its
  assets to increase sales
• Higher the ratio, the better
• Net sales trends
• Gross profit margins (Gross profit/Net sales)