c6 - 1 learning objectives 1.nature of merchandising business 2.accounting for purchases...

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Learning Objectives

1. Nature of Merchandising Business2. Accounting for Purchases3. Accounting for Sales4. Transportation Costs5. Merchandise Transactions6. Merchandising Chart of Accounts7. Merchandising Income Statement8. Merchandising Accounting Cycle9. Financial Analysis and Interpretation

Chapter 6 Accounting for Merchandising Businesses Accounting for Merchandising Businesses

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Nature of merchandise business

Service business– Provide service – Usually it is a small business

Merchandise business– Purchase and sell merchandise inventory– Bigger than service business

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Service Co. Income Statement Year ended June 30, 20xxService revenue $xxxExpenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xx

Merchandising Co. Income StatementYear ended June 30, 20xxSales revenue $xxxCost of goods sold xGross profit xxOperating expenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xx

Comparison of Income Statements: Service Co. And Merchandising Co.

Comparison of Income Statements: Service Co. And Merchandising Co.

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• sales revenue or sales– the amount that a business earns from selling

merchandise inventory is called sales revenue, or sales.

• cost of merchandise sold– the major expense of a merchandiser is cost of goods

sold.

• Gross margin or Gross profit– The excess of sales over cost of sales is called gross

margin.

• Merchandise inventory– Merchandise on hand at the end of an account period

Special terms

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Compute the net income

• Service business:– Fees earned – operating expenses = net income

• Merchandise business:– Sales – cost of merchandise sold = gross profit

– Gross profit – operating expenses = net income

The cost of merchandise sold is the largest expense for the merchandise business, say 70% or more

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Income Statement ComparisonIncome Statement Comparison

Fees earned $150,000

Operating expenses 120,000

Net income $ 30,000

Service Business

Sales revenue $600,000

Cost of mdse. sold 450,000

Gross profit $150,000

Operating expenses 120,000

Net income $ 30,000

Merchandising Business

20% of revenues

5% of revenues

75% of revenues

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Merchandise Inventory

Merchandising involves selling inventory

Inventory is usually an important asset

Inventory must be accounted for periodically or perpetually

Inventory system Perpetual inventory system

Periodic inventory system

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Perpetual inventory system

• In a perpetual inventory system, each purchase and the cost of each sale are recorded in Merchandise Inventory.

• Most companies using the perpetual inventory system.

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Periodic inventory system

• In a periodic inventory system, the inventory records do not show the amount available for sale or sold during the period. Instead, a detailed listing of merchandise for sale at the end of the accounting period is prepared by the physical count.

• This physical inventory is used to determine the cost of the merchandise inventory on hand and the cost of merchandise sold.

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Continuous determination of inventory value

Continuous determination of gross profit Affordable with computers, scanners, and bar codes on most products Perpetual inventory accounting provides management controls Managers know which items are selling fastest and the profit margin on

those items

Advantages of Using Perpetual InventoryAdvantages of Using Perpetual Inventory

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Accounting for purchase

• Purchase order

• Receive the inventory

• Invoice and payment

• Exhibit 1 invoice– Netsolutions purchase $1,500 merchandise inventor

– Credit term: 2/10; n/30

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Purchase and payment

Jan. 12 Merchandise inventory 1500

Accounts payable 1500

Jan. 22 Accounts payable 1500

Cash 1500

Payment without discount

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Purchase and payment

Jan. 12 Merchandise inventory 1500


Jan. 22 Accounts payable 1500

Cash 1470

Merchandise inventory 30

Payment with the discount: 1500 *2% = $30

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Discount rate

• Purchase amount: $1500

• Discount rate: 2% for 20 days 1500* 2% =30

• Interest rate: 12% per year 1470*12%*20/360= 9.80

• Savings from borrowing: 30 –9.80 =20.20

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What is the due date of the invoice?

• Question 1:– An invoice dated august 13, has terms n/30.

• Question 2:– An invoice dated November 22

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What is the due date of the invoice?

• Question 1:– An invoice dated august 13, credit terms n/30.

Solution:– Sep. 12

• Question 2:– An invoice dated November 22, credit terms:2/10,n/30

Solution:– Dec. 2– Dec. 22

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Purchases returns and allowances

• Purchase returns– Purchase business return the merchandise inventory to

selling business

– get a debit memorandum from the sales business

• Purchase allowances– Purchase business do not return the merchandise

inventory to selling business

– get a debit memorandum from the sales business

•

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Purchases returns and allowances

Example : p.231

1. May 2, purchases $5,000 of inventory.

2. May 4, returns $3,000 of inventory

3. Credit term: 2/10; n/30

4. Discount: (5000-3000) * 2% = $40

Recording in the journal

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Accounting for sales

• To record:– Sales revenue– Cost of sales– Sales expenses

• Example: p. 233– Sales :$ 1000– Cost of sales: $550– Credit card charges: $50

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Sales discount

To set up a separate account: sales discounts– It is a contra account to Sales.– Balance on usually on the debit side.

• Example : p. 233– Sales: $1500– Discount: $30 – Net sales: $1470

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Sales returns and allowances

To set up a separate account: – Sales returns and allowances– It is a contra account to Sales.– Balance on usually on the debit side.

• Example : p. 234– Sales returns: $225, cost $140– Record the deduction of sales– Record the deduction of cost of sales

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Sales taxes

Example p.235– Sales price $100– Sales tax rate 6%– Total amount $106 of accounts receivable

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Sales taxesExample p.235

– Sales price $100– Sales tax rate 6%– Total amount $106 of accounts receivable

Accounts receivable 106

Sales 100

sales tax payable 6

Sales tax payable 6

Cash 6

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Trade discount

• Wholesalers give the purchaser the discount for large amount of purchase.

• P. 235– 30% of discount for $2400 sales– The sales revenue: 2400 * 70%=1680

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Transportation cost

• FOB shipping point• FOB destination

• If FOB shipping point, the buyer pays the transportation costs.

• If FOB destination, the seller pays the transportation costs.

seller Shippingpoint

buyer

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Example: FOB shipping point

• Buyer’s record:– Buy merchandise inventory $ 900– Transportation cost $ 50

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Example: FOB shipping point

• Buyer’s record:




Cash 50

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More example

• Under the term of FOB shipping point, sometimes the seller prepaid the transportation cost, then to get the refund from the buyer.– Selling merchandise inventory $800– Term: FOB shipping point– Transportation cost $45

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More example


Sales 800

Cost of merchandise sold 360


Transportation out 45

Cash 45

The seller’s record:

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Example : FOB destination

• seller’s record– selling merchandise inventory $700– Cost of sales $480– Transportation cost 40

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Example : FOB destination

• seller’s record


Sales 700

Cost of merchandise sold 48


Transportation out 40

Cash 40

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Illustration of Accounting formerchandise inventory

Seller: Scully company

Buyer: Burton company

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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory

Description Debit Credit

Accts. Receivable 7,500Sales 7,500

Cost of Mdse. Sold 4,500Mdse. Inventory 4,500

No entry

Mdse. Inventory 7,500Accts. Payable 7,500

Mdse. Inventory 150 Cash 150

SellerSeller BuyerBuyerDescription Debit Credit

July1. Merchandise was sold with credit terms of n/45.

July 2. Paid transportation cost.

Recorded at full costRecorded at full cost

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Accounting for Merchandise TransactionsAccounting for Merchandise Transactions





Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)


July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB destination, n/30. The cost of the merchandise sold was $3,500.

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Transportation Out 250Cash 250


No entry.



July 7. Scully Company paid transportation costs of $250 for delivery of merchandise sold to Burton Co. on July 5.



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Transportation Out 250Cash 250



Sales Ret. & Allow. 1,000Accts Receivable 1,000

Mdse. Inventory 700Cost of Mdse. Sold 700


No entry.

Accts. Payable 1,000Mdse. Inventory 1,000



July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

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Cash 4,000Accts. Receivable 4,000

Accts. Payable 4,000Cash 4,000



July 15. Scully Company received payment from Burton Co. for purchase of July 5.

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Accts. Receivable 12,500Sales 12,000Cash 500




July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.


Mdse. Inventory 12,500

Accts. Payable 12,500

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Accts. Receivable 12,500Sales 12,000Cash 500




Cash 12,260Sales Discounts 240

Accts. Receivable 12,500


Mdse. Inventory 12,500

Accts. Payable 12,500

Accts. Payable 12,500Mdse. Inventory 240Cash 12,260



July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

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Chart of accounts for a merchandise business

• What are new accounts in the chart of accounts?1. Assets2. Liabilities3. Owner’s equity4. Revenue5. Costs and expense6. Other income7. Other expense

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NetSolutionsMerchandising Chart of Accounts

Balance Sheet Accounts

200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable

300 Owner’s Equity310 Chris Clark, Capital311 Chris Clark, Drawing312 Income Summary

100 Assets110 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115115 Merchandise InventoryMerchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—

Store Equipment125 Office Equipment126 Accumulated Depreciation—

Office Equipment

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NetSolutionsMerchandising Chart of Accounts

Income Statement Accounts

600 Other Income610 Rent Income611 Interest Income

700 Other Expense710 Interest Expense

400 Revenues410410 SalesSales411411 Sales Returns and Sales Returns and

AllowancesAllowances412412 Sales DiscountsSales Discounts

500 Costs and Expenses510510 Cost of Merchandise SoldCost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Transportation Out523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense

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Income statement for a merchandise business

• A service business– Single-step form]

• A merchandise business– Multiple-step form– Exhibit 7

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Revenue from sales:Sales $720,185Less:Sales returns and allow. $ 6,140

Sales discounts 5,790 11,930Net sales $708,255

Cost of merchandise sold 525,305

Gross profit $182,950

NetSolutionsIncome Statement (Multiple-Step)

For the Year Ended December 31, 2004

Continued

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Operating expenses:Selling expenses:

Sales salaries expense $60,030Advertising expense 10,860Depr. expense–store equip. 3,100Miscellaneous selling expense 630 Total selling expenses $ 74,620

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equip. 2,490Insurance expense 1,910Office supplies expense 610Misc. admin. expenses 760 Total admin. expenses 34,890

Total operating expenses 109,510

Income from operations $ 73,440

Continued

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Other income:Interest revenue $ 3,800Rent revenue 600

Total other income $ 4,400Other expense:

Interest expense 2,440 1,960

Net income $75,400

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Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600

Total revenues $712,655Expenses:

Cost of merchandise sold $525,305Selling expenses 74,620Administrative expenses 34,890Interest expense 2,440

Total expenses 637,255

Net income $ 75,400

NetSolutionsIncome Statement (Single-Step)

For the Year Ended December 31, 2004

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NetSolutionsBalance Sheet

December 31, 2002

Continued

AssetsCurrent assets:

Cash $ 52,950Notes receivable 40,000Accounts receivable 60,880Interest receivable 200Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650

Total current assets $219,310

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December 31, 2002

Property, plant, and equipment:

Land $ 10,000Store equipment $ 27,100 Less accum. depreciation 5,700 21,400

Office equipment $ 15,570 Less accum. depreciation 4,720 10,850Total property, plant, and

equipment 42,250

Total assets $261,560

Continued

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December 31, 2002

LiabilitiesCurrent liabilities:

Accounts payable $ 22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

Total current liabilities $30,360Long-term liabilities:

Note payable (due 2004) 20,000

Total liabilities $ 50,360 Owner’s Equity

Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

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Merchandise inventory shrinkage

• Book records: $63,950

• Physical inventory : $ 62,150

• Inventory shortage: $ 1,800

• Adjusting:Cost of merchandise sold 1800


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Profitability AnalysisProfitability Analysis

Profitability is the ability of an entity to earn profits.

This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.

Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

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Profitability Measures — Effective Use of AssetsProfitability Measures — Effective Use of Assets

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets

2003 2002Net sales $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500

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Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets

Use: To assess the effectiveness in the use of assets

Use: To assess the effectiveness in the use of assets

Net sales on account $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500

Ratio of net sales to assetsRatio of net sales to assets 1.4 to 11.4 to 1 1.2 to 11.2 to 1

Profitability Measures — Effective use of AssetsProfitability Measures — Effective use of Assets

2003 2002

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HOME WORK

READING:1. Illustrative problem2. Self- examination questions3. Multiple choice

Writing:1. Exercise: 6-25;6-26;6-27 2. Problem : 6-5B

Discussion:

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This is the end of Chapter 6. This is the end of Chapter 6.

c6 - 1 learning objectives 1.nature of merchandising business 2.accounting for purchases...

Documents

inventory inventory

merchandise inventory

sales cost of merchandise

physical inventory

perpetual inventory

perpetual inventory

inventory records

net income service business