5-1 ©2006 prentice hall, inc.. 5-2 ©2006 prentice hall, inc. accounting for merchandising ops (1...


ACCOUNTING FOR ACCOUNTING FOR MERCHANDISING MERCHANDISING OPS OPS (1 of (1 of

2)2)

Learning objectivesMerchandising firmsAcquiring merchandise for saleSale of merchandise


ACCOUNTING FOR ACCOUNTING FOR MERCHANDISING MERCHANDISING OPS OPS (2 of (2 of

2)2)

Recording inventoryMultiple-step income statementFinancial statement analysisBusiness risk, controls, and ethi

cs


Learning ObjectivesLearning Objectives(1 of 2)(1 of 2)

1. Describe the differences between service and merchandising firms

2. Explain how merchandise in acquired and perform the related record-keeping

3. Explain how sales are made and perform the related record-keeping

4. Explain the differences between a periodic and perpetual inventory system


Learning ObjectivesLearning Objectives(2 of 2)(2 of 2)

5. Explain the difference between a single-step income statement and a multiple-step income statement

6. Compute the gross profit ratio and profit margin ratio to evaluate a firm’s profitability

7. Recognize the special risks and controls related to inventory


Merchandising FirmsMerchandising Firms(1 of 3)(1 of 3)

Two types of merchandising firmsRetailers sell products to the final

consumerWholesalers sell products to retailers or

other wholesalersCost of Goods Sold (CoGS)

Cost of merchandise sold during the period


Merchandising FirmsMerchandising Firms(2 of 2)(2 of 2)

Gross profit (also called gross margin)Sales Revenue – CoGS

Operating cycle for merchandising firmPurchase inventorySell inventory, creating accounts

receivable (AR)Collect cash from customers, reducing AR


Acquiring Merchandise Acquiring Merchandise For SaleFor Sale

(1 of 2)(1 of 2)

What is merchandise inventory?Where on the balance sheet is it?

Acquisition process for inventoryPeriodic & perpetual inventory


Acquiring Merchandise Acquiring Merchandise For SaleFor Sale

(2 of 2)(2 of 2)

Recording purchases: perpetualFreight costsPurchase Returns and AllowancesPurchase DiscountsGoods available for sale

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©2006 Prentice Hall, Inc.

Acquisition Process for Inventory

(1 of 3)

Inventory manager sends purchase requisition to purchase agent

Purchase agent sends purchase order (PO) to chosen vendorCopies to accounts payable (AP) and

receiving departmentsNo quantity on receiving dept’s copy

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(2 of 3)

Objectives of purchase processQuality

Purchase from reliable vendorsTimeliness

Vendors must have an adequate supply of merchandise to avoid stock-outs

AccuracyReceive only items ordered

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(3 of 3)

Receiving dept notifies AP dept when goods arrive

AP pays for goods when it receives invoice from vendorInvoice matched with purchase order

How does a computer change this process?

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Periodic and Perpetual Inventory

Perpetual inventory systemEvery purchase of inventory is

recorded directly to inventory account

Periodic inventory systemInventory account only updated at

the end of the accounting period

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Recording Purchases: Perpetual Transaction 1

Gravity Power Sports (GPS) Purchase 20 skateboards on account for $150 eachIncrease inventory $3,000Increase AP $3,000

Record the journal entryDr. Cr. Dr. Cr.

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Freight Costs Transaction 2 (1 of 3)

FOB (free on board) shipping pointShipping is free until it leaves the

seller’s loading dockBuying firm pays freight

Recorded as freight-in Included in cost of inventory

Who owns the goods while they are in transit? Where does title pass?

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Freight Costs Transaction 2 (2 of 3)

FOB destinationShipping is free until it arrives at the

buyer’s place of businessSelling firm pays the freight

No freight-in chargeNot included in cost of inventory

Who owns the goods while they are in transit? Where does title pass?

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Freight CostsTransaction 2 (3 of 3)

Shipping charges to GPS on skateboards were $100 with terms FOB shipping pointWhat accounts are affected?

Do they increase or decrease?

Dr. Cr. Dr. Cr.

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Purchase Returns and Allowances

Transaction 3 (1 of 3)

Amounts that reduce $$ of inventory purchases due to returned or damaged inventoryAlso reduce accounts payable for

inventory purchased on accountWhich account is affected if the

inventory was purchased for cash?

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Transaction 3a (2 of 3)

Purchase returnThree skateboards were defective

(3@$150) and returned to the vendor

Dr. Cr. Dr. Cr.

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Transaction 3b (3 of 3)

Purchase allowanceThe decks had graphics for Bores of Hogtown movie

instead of Lords of Dogtown movieGPS received a $250 purchase allowance

Dr. Cr. Dr. Cr.

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Purchase Discounts Transaction 4 (1 of 4)

3/10, n/45

3% discount

If received w/in 10 days

Or full amount Due w/in

45 days

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Purchase Discounts Transaction 4 (2 of 4)

Annual rate of return if taking advantage of discount

Discount# of days paid early

Annual rate of return

÷ x 360(or 365)

=

Calculate the annual rate of return if you pay early with terms 3/10, n/45

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Purchase Discounts Transaction 4a (3 of 4)

GPS pays the balance due within the discount period with terms 3/10, n/45Discount calculated on balance due

Inventory Accts. Payable

Dr. Cr. Dr. Cr. Dr. Cr.3,000

1003,000450

250450250

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Purchase Discounts Transaction 4b (4 of 4)

How would the transaction change if GPS paid outside of the discount period?

Inventory Accts. Payable

Dr. Cr. Dr. Cr. Dr. Cr.3,000

1003,000450

250450250

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Goods Available for Sale

Beginning inventory+ Net purchases (total purchases less returns and allowances and discounts)

+ Shipping costs (freight in) _

Goods available for sale

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Sale of MerchandiseSale of MerchandiseSales are the mirror image of purchases

What the vendor records when you make an inventory purchase

Sales process for merchandise inventory

Recording salesSales Returns and AllowancesSales DiscountsNet salesCredit card sales and sales taxes

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Sales Process for Merchandise Inventory

Steps in the sales process1.Customer places an order2.Company approves the order3.Warehouse selects goods for shipment4.Company ships goods5.Company bills customer for goods6.Company receives payment for the

goods

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Recording SalesTransaction 5: Revenue (1 of 3)

GPS sells 11 skateboards on account for $250 each

Increase Sales $2,750 Increase AR $2,750

Dr. Cr. Dr. Cr.

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Recording SalesTransaction 5: Expense (2 of 3)

How much did GPS pay for the 17 (20 – 3 returned) skateboards assuming they paid w/in the discount period?

$3,000 purchase price+ 100 freight-in- 450 purchase return- 200 purchase allowance

$2,400 for 17 skateboards How much did each skateboard cost?

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Recording SalesTransaction 5: Expense (3 of 3)

GPS sells 11 skateboards on account for $250 each 1/15, n/30

Increase or decrease merchandise inventory?

Increase CoGS $2,750 On which fin. stmt. will you find CoGS?

Dr. Cr. Dr. Cr.

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Sales Returns and Allowances


Contra-revenue accountUsed to reduces a firm’s revenue

Net revenueRevenue less contra-revenue

Sales Returns and AllowancesDecrease revenue because you reduce

a customer’s AR account or give a cash refund (if the customer paid cash)

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Customer returned one skateboard because it was defectiveFirst, undo the revenue side of the

transactionWhat was the sale price of the merchandise?

Second, undo the expense side of the transactionHow much did the merchandise sold cost?

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Transaction 6: Reverse Revenue (3 of 5)

The sales price was $250Increase Sales Returns and

AllowancesIf revenues increase with credits, how

would you increase a contra-revenue?Decrease AR

Dr. Cr. Dr. Cr.

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Transaction 6: Reverse Expense (4 of 5)

Cost of the merchandise sold was $150Reduce CoGS by $150What happens to the inventory

account?

Dr. Cr. Dr. Cr.

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Transaction 6: Reverse Expense (5 of 5)

How would the transaction change if GPS granted a Sales Allowance?Would the revenue side of the sale

need to be reversed?Would the expense side of the sale

need to be reversed?Why would a business record SR&A

in a separate account?

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Sales DiscountsTransaction 7 (1 of 4)

Sales discountReduction in sales price offered for

prompt paymentContra-revenue

Reduces net salesBased on customer’s outstanding

balance from salesSales price less SR&A

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Sales Discounts Transaction 7 (2 of 4)

Amount to be received if payment is received w/in discount periodCash collected

($2,750 – $250) x (1 – 1%)Sales discount – increases contra revenue

($2,750 – $250) x 1%Accounts receivable decreases by full amount

owedCustomers balance completely satisfied for 99% of

the amount due

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Make the journal entry if payment received w/in discount periodIncrease CashIncrease Sales DiscountsDecrease AR

Accts. Rec.

Dr. Cr. Dr. Cr. Dr. Cr.2502,750

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How would the journal entry change if the customer paid outside the discount period?How much cash is received?

Accts. Rec.

Dr. Cr. Dr. Cr. Dr. Cr.2502,750

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Net Sales

Sales- Allowances given- Sales Discounts _

Net sales

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Credit Card Sales and Sales Taxes(1 of 4)

Bank cardsCash saleCredit card company pays seller full

amount less a service fee (2% - 4%)Service fee is an expense

E.g, Visa, MasterCard, American Express

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Sales taxSeller collects sales tax from

customer and remits to state/local government

LiabilitySales tax payable

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Sell $100 of merchandise to customerSales tax rate is 5%Customer pays with bank card with a

3% service feeCash collected

$100 – (3% x $100) + (5% x $100)Service Revenue = $100

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Journal entryIncrease CashIncrease Service Fee (expense)Increase SalesIncrease Sales Tax Payable

Dr. Cr. Dr. Cr.

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Recording InventoryRecording Inventory(1 of 2)(1 of 2)

Perpetual inventory systemInventory records updated every time

a purchase, sale, or return is madePeriodic inventory system

Inventory records only updated at end of accounting period

Both systems require an actual inventory count at end of period

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Recording InventoryRecording Inventory(2 of 2)(2 of 2)

Perpetual inventory system can detect shrinkageShrinkage = Inventory account

balance less actual inventory $$ amount based on physical count of merchandise

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Multistep Income Multistep Income StatementStatement

(1 of 2)(1 of 2)

Single-step income statementAll revenues presented firstAll expense subtracted to arrive

at net income

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Multistep Income Multistep Income StatementStatement

(2 of 2)(2 of 2)

Multiple-step income statementGross profit

Sales – CoGSOperating income

Gross profit – operating expensesOther revenues and expenses not

directly related to firm’s day-to-day operations

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Financial Statement Financial Statement AnalysisAnalysis

Profitability Measures (1 of 4)Profitability Measures (1 of 4)

Gross profit ratioGross Profit ÷ SalesPortion of each sales $ a company

has left after paying for goods it sold

Amount left over to cover operating and non-operating expenses and generate a profit

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Profitability Measures (2 of 4) Profitability Measures (2 of 4)

Profit margin ratioNet Income ÷ SalesMeasures % of each sales $ that

results in net incomeA measure of how well a company

is controlling its operating expenses

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Example: GPS’s results for 2008 & 2009

Year 2008 2009

Sales $500,000 $600,000

CoGS $300,000 $400,000

Net Income $ 50,000 $ 80,000

Gross Profit Ratio

$200K/$500K=40%

$200K/$600K=33%

Profit Margin Ratio

$50K/$500K=10% $80K/$600K=13%

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Explain the trend in GPS’s gross profit ratio

Explain the trend in GPS’s profit margin ratio

What can you say about GPS’s profitability based on these ratios?

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Business Risk, Control, Business Risk, Control, and Ethicsand Ethics

Segregation of dutiesPerson with physical control over

merchandise should NOT also do the record-keeping on the merchandise under her control

However, this control can be defeated if both people get together to commit fraudSee In the News—Risks and Controls

Comments or questions about PowerPoint Slides?Contact Dr. Richard Newmark atUniversity of Northern Colorado’s

Kenneth W. Monfort College of [email protected] 5-

54©2006 Prentice Hall, Inc.

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