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5 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Merchandising Operations
and the Accounting Cycle
Chapter 5
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5 - 2©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
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 xNet income $ xx
Income StatementsIncome Statements
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5 - 3©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use sales and gross profit
to evaluate a company.
Objective 1
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5 - 4©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Net salesNet sales
Sales Revenue less Sales Returns and Sales DiscountsSales Revenue less Sales Returns and Sales Discounts
=
Sales Revenue
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5 - 5©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Target CorporationIncome Statement (Adapted)
Year Ended December 31, 2000Net sales revenue (same as Net sales) $33,212Cost of goods sold (same as Cost of sales) 23,029Gross profit (same as Gross margin) 10,183Expenses: Selling, general, administrative 7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302Total operating expenses 9,039Net earnings (same as Net income) $ 1,144
Millions
Gross Profit or Gross Margin
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5 - 6©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Operating Cycle of a Merchandising Business
CashCash
InventoryInventory
CashCash
InventoryInventoryAccounts
ReceivableAccounts
Receivable
Purchase and Cash Sale Purchase and Sale on Account
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5 - 7©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
PerpetualPerpetual
PeriodicPeriodic
Inventory Systems
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5 - 8©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Account for the purchase
and sale of inventory.
Objective 2
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5 - 9©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase of Inventory
Merchantpreparespurchase
order
Merchantpreparespurchase
order
Supplierssend
merchandiseand a bill
Supplierssend
merchandiseand a bill
ComparesCompares
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5 - 10©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase of Inventory Example
On May 1, the Sporting Store acquired on account $2,000 of various items for resale.
The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale.
What is the journal entry?
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5 - 11©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
May 1
Inventory $2,000 Accounts Payable $2,000
Purchased inventory on account
Inventory Accounts Payable 2,000 2,000
May 1
Inventory $2,000 Accounts Payable $2,000
Purchased inventory on account
Inventory Accounts Payable 2,000 2,000
Purchase of Inventory Example
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5 - 12©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Purchase Returnsand Allowances Example
Assume that on May 4 a $100 item was returned prior to payment of the invoice.
What is the journal entry?
May 4 Accounts Payable 100
Inventory 100 Merchandise was returned
May 4 Accounts Payable 100
Inventory 100 Merchandise was returned
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5 - 13©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Purchase Returnsand Allowances Example
Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance.
What is the journal entry?
May 4 Accounts Payable 10 Inventory 10Received a purchase allowance
May 4 Accounts Payable 10 Inventory 10Received a purchase allowance
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5 - 14©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Purchase Returnsand Allowances Example
Inventory 2,000 100 10
Bal. 1,890
Accounts Payable100 2,000 10
Bal. 1,890
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5 - 15©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase Discounts
Credit terms are stated in expressions such as: 2/10, N/30, meaning that a discount of 2% is
allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days.
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5 - 16©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase Discounts Example
Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30.
The store paid within the discount period. The 2% discount ($20) is deducted from the
amount due ($1,000) and $980 is remitted.
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5 - 17©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchase Discounts Example
What is the journal entry?
Accounts Payable 1,000Cash 980Inventory 20
To record payment of invoice within the discount period
Accounts Payable 1,000Cash 980Inventory 20
To record payment of invoice within the discount period
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5 - 18©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Transportation Costs
Transportation costs are the cost of moving inventory from seller to buyer.
FOB stands for Free on Board and governs the passing of title of the goods.
Selling/buying agreements usually specify FOB terms.
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5 - 19©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Recording Transportation Costs
FOB Shipping PointFOB Shipping Point
FOB DestinationFOB Destination
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5 - 20©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Freight Charges Example
Assume that on May 9 the Sporting Store paid $60 for freight.
What is the journal entry?
May 9Inventory 60
Cash 60 Paid a freight bill
May 9Inventory 60
Cash 60 Paid a freight bill
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5 - 21©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sporting Store Example
Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash.
What are the journal entries?
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5 - 22©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sporting Store Example
May 11Cash 2,600
Sales Revenue 2,600To record sale of merchandise
May 11Cash 2,600
Sales Revenue 2,600To record sale of merchandise
May 11Cost of Goods Sold 1,800
Inventory 1,800To record the cost of merchandise sold
May 11Cost of Goods Sold 1,800
Inventory 1,800To record the cost of merchandise sold
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5 - 23©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sporting Store Example
On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000.
Terms are 2/10, N/30.
Invoice Maria Gym Terms 2/10, N/30 Total $5,000
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5 - 24©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Discounts and Sales Returns and Allowances
Example On May 17, Maria Gym returned $1,500
worth of goods that cost $900. In addition, a credit of $100 was allowed
for merchandise that was damaged. What are the journal entries?
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5 - 25©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Discounts and Sales Returns and Allowances
ExampleMay 17Sales Returns and Allowance 1,500
Accounts Receivable 1,500Received returned merchandise
May 17Sales Returns and Allowance 1,500
Accounts Receivable 1,500Received returned merchandise
May 17Inventory 900
Cost of Goods Sold 900Returned goods to inventory
May 17Inventory 900
Cost of Goods Sold 900Returned goods to inventory
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5 - 26©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Discounts and Sales Returns and Allowances
Example
There is no entry required for inventory since the goods were not returned.
May 17Sales Returns and Allowance 100
Accounts Receivable 100Credit granted for damaged goods
May 17Sales Returns and Allowance 100
Accounts Receivable 100Credit granted for damaged goods
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5 - 27©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Accounts Receivable May 15 = $5,000Accounts Receivable May 15 = $5,000
Less May 17 returns and allowances $1,600Less May 17 returns and allowances $1,600
Equals May 20 balance due of $3,400Equals May 20 balance due of $3,400
Sales Discounts and Sales Returns and Allowances
Example On May 20, the store received a check from
Maria Gym for the balance due. What is the balance due?
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5 - 28©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Sales Discounts and Sales Returns and Allowances
Example Maria took advantage of the sales terms –
2/10, N/30.
May 20Cash 3,332Sales Discounts 68
Accounts Receivable 3,400Cash collected within the discount period
May 20Cash 3,332Sales Discounts 68
Accounts Receivable 3,400Cash collected within the discount period
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5 - 29©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Adjust and close the accounts of a merchandising business.
Objective 3
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5 - 30©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Book InventoryBalance
$255,000
Book InventoryBalance
$255,000
PhysicalCount
$252,500
PhysicalCount
$252,500
$2,500 difference$2,500 difference
Adjustments to Inventory Example
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5 - 31©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
December 31Cost of Goods Sold 2,500
Inventory 2,500To adjust inventory to physical count
December 31Cost of Goods Sold 2,500
Inventory 2,500To adjust inventory to physical count
Adjustments to Inventory Example
What is the journal entry?
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5 - 32©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Revenues IncomeSummary
C.G.S.
Sales Discount22,824
Returns and A.32,605
CapitalAccount
1,490,400
2,760,000 7,348 2,767,348
Other Exp.
1,884,348
883,000
883,000 338,519
Closing Entries for a Merchandising Business
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5 - 33©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Prepare a merchandiser’s
financial statements.
Objective 4
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5 - 34©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Income Statement Formats
There are two basic formats for the income statement:
1 Multi-step2 Single-step
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5 - 35©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Multi-Step Format
Sporting StoreIncome Statement
Year Ended December 31, 2002Sales revenue $2,760,000Sales discounts – 22,824Returns and allowances – 32,605Net sales revenue $2,704,571Cost of goods sold –1,490,400
Gross margin $1,214,171
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5 - 36©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Multi-Step Format
Gross margin $1,214,171Operating expenses:Wage expense – 166,285Rent expense – 137,000Insurance expense – 16,302Depreciation expense – 9,781Supplies expense – 8,151
Operating income $ 876,652
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5 - 37©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Multi-Step Format
Operating income $876,652Other revenue and expenses:Interest revenue 7,348Interest expense – 1,000
Net income $883,000
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5 - 38©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Single-Step Format
Sporting StoreIncome Statement
Year Ended December 31, 2002
Revenues:Net sales (net of sales discounts) $2,704,571Interest revenue 7,348
Total revenues $2,711,919
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5 - 39©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Single-Step Format
Expenses:Cost of goods sold $1,490,400Wage expense 166,285Rent expense 137,000Interest expense 1,000Insurance expense 16,302Depreciation expense 9,781Supplies expense 8,151Total expenses $1,828,919
Net income $ 883,000
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5 - 40©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Use the gross margin percentage
and the inventory turnoverratio to evaluate a business.
Objective 5
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5 - 41©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Inventory turnover = Cost of goods sold÷ Average inventory
Inventory turnover = Cost of goods sold÷ Average inventory
Gross profit percentage = Gross profit÷ Net sales revenue
Gross profit percentage = Gross profit÷ Net sales revenue
Using the Financial Statements for Decision Making
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5 - 42©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Gross Profit on $1 for Three Merchandisers
Grossmargin$0.45
Grossmargin$0.42
Cost ofgoods sold
$0.55
Cost ofgoods sold
$0.58
Cost ofgoods sold
$0.79
Grossmargin$0.21
Wal-MartStores, Inc.
$1.00 —
$0.75 —
$0.50 —
$0.25 —
$0.00 AustinSound
TargetCorporation
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5 - 43©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Rate of Inventory Turnover for Three Merchandisers
1
Wal-Mart Stores, Inc.
2 3 4 5 6 7
1
Target Corporation
Austin Sound
7.0 timesper year
Jan Mar Jun Sep Dec
2 3 4 5
5.4 timesper year
1 2
2.3 timesper year
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5 - 44©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Compute thecost of goods
sold.
Objective 6
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5 - 45©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
Purchases of inventory – Purchases discounts –Purchases returns and allowances = Net purchases
Purchases of inventory – Purchases discounts –Purchases returns and allowances = Net purchases
Beginning inventory + Net purchases + Freight-in= Cost of goods available for sale
Beginning inventory + Net purchases + Freight-in= Cost of goods available for sale
Cost of goods available for sale – Ending inventory= Cost of goods sold
Cost of goods available for sale – Ending inventory= Cost of goods sold
Computing the Cost of Goods Sold in a Periodic System
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5 - 46©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
BeginningInventory$20,000
BeginningInventory$20,000
Purchases andFreight-In$101,000
Purchases andFreight-In$101,000
EndingInventory$15,000
EndingInventory$15,000
Cost of GoodsSold
$106,000
Cost of GoodsSold
$106,000
Cost of GoodsAvailablefor Sale
$121,000
Cost of GoodsAvailablefor Sale
$121,000
Computing the Cost of Goods Sold in a Periodic System
Computing the Cost of Goods Sold in a Periodic System
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5 - 47©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber
End of Chapter 5