1. merchandising business

Universidad CuauhtémocCampus Aguascalientes

Maestría en Administración

Accounting for Merchandising Business

Análisis de Costos


Análisis de Costos


Contents

Nature of Merchandising Business1

Accounting for Inventory Purchases2

Purchases and Sales Discounts3

Transportation Cost4


Contents

Financials5

Analysis and Interpretation6

Class Discussions7

Presentations8

Nature of Merchandising Business

How do activities of an attorney and an architect, which are service businesses, differ from those of Wal-Mart or Kmart, which are merchandising businesses?

These differences are best illustrated by focusing on the revenues and expenses in the following condensed income statements.

Category 2009 Model

Fees Earned $XXX 100%

Operating Expenses -XXX 75%

Net Income $XXX 25%

Service BusinessCategory 2009 Model ebay

Sales $XXX 100% 100%

Cost of Merchandise Sold -XXX 70% 26%

Gross Profit $XXX 30% 74%

Operating Expenses -XXX 15% 53%

Net Income $XXX 15% 21%

Merchandising Business


Wal Mart Income Statement

http://finance.yahoo.com/q/is?s=WMT&annual

75%

6%

19%

25%

100%

All numbers in $K


Wal Mart Strategic Model


• Always Low Prices (from 8% to 39% lower than competition)• Lowest cost suppliers• Perpetual Inventory system• Internal Controls in place• Employee wages below average

Accounting for Inventory Purchases

There are two systems that can be used to account for merchandise purchases: Perpetual and Periodic.

In the perpetual inventory system, each purchase and sale of merchandise is recorded in an inventory account. As a result the inventory balance is always up to date.

In the periodic inventory system, the current inventory balance is not available in the accounitng records, instead a detailed listing of the merchandise for sale (called a physical inventory) at the end of the accounting period is prepared. This report is used to determine the following:

1. The cost of the merchandise on hand2. The cost of the merchandise sold during the period.


Purchases and Sales Discounts

Sales Discount Reduce sales revenue.

Purchase Discount Is determined by the credit terms that the buyer and the seller agree. Most commonly used are:

2/10 = 2% discount if paid within 10 days.

n/30 = net amount due within 30 days.

Direct Impact toProfit ($)


Savings Calculation $USD

Discount of 2% on $1500 $30.00

Interest for 20 days at rate of 12% on $1470 -9.80

Savings from borrowing $20.20

The terms of a sale indicate when the ownership (title) of the merchandise passes to the buyer. This point determines which party, the buyer or the

seller, must pay for the transportation cost.

SELLERWarehouse

SHIPPING

• Title passes to buyer• Buyer pays for freight

cost• Freight cost included to buyer Inventory cost.

Transportation Cost

BUYERWarehouseDESTINATION

• Title passes to buyer• Seller pays for freight cost• Freight cost included to seller operating expense.


• Transportation cost• Insurance• Delivery associated risksFOB Osaka FOB Chicago

FOB Shipping Point

FOB Destination

Financials

1. COA 2. IS

3. RE 4. BS

Analysis and

Decision Making

COA is used to group transactions by type

Cash, Inventory, Account Receivables, Accounts Payable & stock equity.

• Revenue• Cost • Expense• Income

The RE shows the business accumulated profit or loss and the dividends delivered to stock holders.

2. Income StatementThe income statement shows the performance of the Merchandise Business in a given period.

1. Chart of AccountsReflects the type of merchandising transactions.

3. Retained EarningsShows the net proft/loss of the business since it started operations and the dividends delivered to the stock holders.

4. Balance SheetShows the financial position of the business in terms of assets, liabilities and stock equity.

The financial information is used for the analysis and decision making.


Financial Analysis and Interpretation

$in millions Sears J.C. Penney

Net Sales $38,236 $23,649

Total Assets BOP 33,130 17,102

Total Assets EOP 36,137 22,088

Ratio of Net Sales to Assets X.XX X.XX


Ratio of Net Sales to Assets =Net Sales

Average Total Assets

The ratio of net sales to assets measures how effectively a business is using its assets to generate sales. A high ratio indicates an effective use of assets. The assets used in computing the ratio may be the total

assets at the ending of the year or the year average.

Use previous formula to compute the ratio for below merchandising companies:

Financial Analysis and Interpretation

$in millions Sears J.C. Penney

Net Sales $38,236 $23,649

Total Assets BOP 33,130 17,102

Total Assets EOP 36,137 22,088

Ratio of Net Sales to Assets 1.10 1.21

Net Sales to Assets

Sears J.C Penney

1.10

1.21Delta 10.0%


Ratio of Net Sales to Assets =Net Sales

Average Total Assets

Based on these ratios J.C. Penney appears better thanSears in utilizing its Assets to generate sales.

For J.C. Penney the $1.21 can be read as follows:Every $1.0 invested as an asset generates $1.21 of sales.

Wal-Mart Ratio 2.48

Class Discussions

What distinguishes a merchandising business from a service business?

Can a business earn a gross profit but incurr a net loss? Explain.

What is the meaning of: 1/10, n/60 n/30 n/eom

Who pays for transportation cost when the terms of sale are: FOB shipping point FOB destination

During the current year, merchandise is sold for $180,000 cash and for $520,000 on account. The cost of the merchandise sold is $420,000. What is the amount of the gross profit Will the income statement necessarily report a net income? Explain.


Class Discussions

What distinguishes a merchandising business from a service business? The primary differences relate to revenue activities. Merchandising business purchase merchandise for selling to customers

Can a business earn a gross profit but incur a net loss? Yes, if operating expenses become greater than gross profit, then the result will be a net loss.

What is the meaning of: 1/10, n/601% discount within 10 days, Net due balance 60 days n/30 Net due balance 30 days n/eom Net due balance at end of month

Who pays for transportation cost when the terms of sale are: FOB shipping point Buyer FOB destination Seller

During the current year, merchandise is sold for $180,000 cash and for $520,000 on account. The cost of the merchandise sold is $420,000. What is the amount of the gross profit $280,000 Will the income statement necessarily report a net income? Not necessarily,

if operating expenditures become greater than gross profit, then the income statement will report a net loss.


Universidad CuauhtémocCampus Aguascalientes

1. merchandising business

Business

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penney net sales

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