pp for chapter 4 - merchandise business

7/31/2019 PP for Chapter 4 - Merchandise Business

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GROUP PROJECT

FIND YOUR OWN GROUP OF 10PEOPLEPERGROUP. SUBMIT TO ME THE LIST NAME OF YR GROUP

MEMBERS (WITH PHONE NO OF THE GROUP

LEADER) AND COMPANY THAT YOU CHOOSE.YOUR TASK: CHOOSE A PUBLIC LISTED COMPANY (DONT

CHOOSE BANKS OR FINANCIAL INSTITUTIONS)

E.G TM BHD, UEM ETC. 1COMPANY1GROUP.PREPARE A20 PAGES REPORT OF 5YEARSFINANCIAL STATEMENT ANALYSIS BASED ONCHAPTER 6 AND 7.

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Click to edit Master subtitle style5/25/12

Chapter 4

ACCOUNTING FOR

MERCHANDISINGBUSINESSES

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TOPIC OUTLINE

33

Merchandising business

1) FinancialStatement

Whats thedifferent

withservices?

4) CreditTerms and

discounts

3)Transportatio

n Terms

2)Inventory

system

b)PeriodicSystem

a)Perpetual

System

a) FOBShippi

ngPoint

b) FOBDestinati

on

5) Atransaction

affected both

parties. Sellerand Buyer

What sthe

different?

What s thedifferent? How

to recordstransactions?


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1.Distinguish between activities and FS of serviceand merchandising businesses

2.Describe and illustrate the FS of a merchandisingbusiness.

3.Describe and illustrate the accounting formerchandise transactions including:

sale of merchandise purchase of merchandise transportation costs, sales taxes, trade discounts dual nature of merchandising transactions

4.Describe the adjusting and closing process for amerchandisin business.

44

OBJECTIVES


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Distinguish between the activities andfinancial statements of service and

merchandising businesses

Objective 1

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Service Business vs Merc. BusinessIncome Statement

Service Business:

Fees earned

RMXXX

Operating expenses

XXX

Income Statement

Merchandising Business:

Sales

RMXXXCost of merchandise

sold

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Determine Gross Profit:

During the current year, merchandise is sold forRM250,000 cash and for RM975,000 on account. The

cost of the merchandise sold is RM735,000. What isthe amount of the gross profit?

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Gross Profit = Sales - COGS

490k


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The Operating Cycle

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Describe and illustrate the financialstatements of a merchandising business

99

Objective 2


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Types of Income Statement

1010


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Multiple-Step Income Statement Sales

-both cash & credit (on account) sales. Sales returns and allowances

-for damaged or defective merchandise.

Sales discounts-given to buyers for early payment.

1111

Sales (cash + credit) 120,000

Less Sales returns & allowances (15,500)

(2,300)Less Sales discount

Net Sales 102,200

(17,800)

Gross profit

Less Cost of goods sold (79,200)

23,000


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Single-Step Income Statement Deducts the total of all expenses in one step from

the total of all revenues to get the net income. Refer Exhibit 3

1212

6-2


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1313

Revenues:Net sales RM708,255

Rent revenue 600Total revenues RM708,855

Expenses:Cost of merchandise sold RM525,305Selling expenses 70,820Administrative expenses 34,890

Interest expense 2,440Total expenses 633,455

Net income RM 75,400

NetSolutionsIncome StatementFor the Year Ended December 31, 2009

Exhibit 3: Single-Step IncomeStatement


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Example Exercise 4-2

Based upon the following data, determine the costof merchandise sold for May.

Merchandise Inventory, May 1 RM121,200Merchandise Inventory, May 31 142,000Purchases 985,000

Purchases Returns and Allowances 23,500Purchases Discounts 21,000Transportation In 11,300

1414


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Merchandise Inventory, May 1 RM121,200

Purchases RM985,000Less: Purchases returns & allowances 23,500Purchases discounts 21,000

Net purchases RM940,500Add transportation in 11,300

Cost of merchandise purchased 9 51,800Merchandise available for sale

RM1,073,000Less merchandise inventory, May 31

142,000Cost of merchandise sold RM

931,000

1515

6 6


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Describe and illustrate the accounting formerchandise transactions including: saleof merchandise; purchase of

merchandise; transportation costs, sales

taxes, trade discounts; and dual nature ofmerchandise transactions.

1616

Objective 3


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1717

Cash Sales

On January 3, NetSolutions sold RM1,800 ofmerchandise for cash. The cost of the merchandisesold was RM1,200.

Using a perpetual inventory, the RM1,200 cost of theinventory must be recorded.

8 8


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Sales on account On January 12, NetSolutions sold merchandise on

account to Sims Company, RM510. The cost of themerchandise sold was RM280.

1818

Jan 12 Accounts Receivable -Sims

510

Sales 510To record credit sales toSims

12Cost of merchandise 280

1919


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Definitions Credit terms

the terms for when payments for merchandise areto be made

Credit period time allowed for the buyer to pay example: n/30, n/eom

Discount period discount would be given if buyer pays within the

period example: 2/10, n/30

1919

2020


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2020

If invoice ispaid within

10 days ofinvoice date

Invoice forRM1,500

Terms:

2/10, n/30

RM1,470 paid(RM1,500 less a2% discount)

Credit Terms

2121


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2121

If invoice isNOT paid

within 10days ofinvoice date

Invoice for

RM1,500Terms:

2/10, n/30

Full amount(RM1,500) is duewithin 30 days of

invoice date

2222


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Example Jan 15 Sold merchandise on account to Omega, RM1,500,terms 2/10, n/30. Cost of the merchandise sold was RM1,100.

Jan 22 Received payment from Omega, less discount.

2222

Jan 15Accounts Receivable Omega

1,500

Sales 1,500

Cost of merchandise sold 1,100Merchandise inventory 1,100

Jan 22Cash 1,470

2323


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Sales returns and allowances Sales returns when buyer returns

merchandise

Sales allowances when seller reduces theinitial price at which the goods were sold

2323

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Example Jan 13 Received merchandise returned by Triang.

The selling price of the merchandise was RM225and the cost was RM140.

2424

Jan 13Sales returns andallowances

225

Accounts Receivables Triang

225

Merchandise inventory 140Cost of merc a d se 0

2525


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Example Exercise 4-3Journalize the following transactions:

a. Sold merchandise on account, RM7,500 with terms of

2/10, n/30. The cost of the merchandise sold wasRM5,625.

b. Received payment less the discount.

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2626


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a.Accounts Receivable 7,500Sales 7,500

Cost of merchandise sold 5,625

Merchandise inventory 5,625

b.Cash 7,350

Sales discounts (98% x 7,500) 150

Accounts Receivable 7,500

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Purchase transactions Jan 3 Purchased transactions for cash, RM2,510. Jan 4 Purchased merchandise on account from

Pemborong Maju, RM9,250.

2727

Jan 3Merchandise Inventory 2,510

Cash 2,510

Jan 4Merchandise Inventory 9,250

Accounts Payable Maju 9,250

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Purchase transactions withdiscount Mar 12: Purchased transactions on account fromAlpha, RM3,000, terms 2/10, n/30.

If payment is made within 10 days (by Mar 22),buyer is entitled for 2% discount. Full paymentmust be made within 30 days.

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If payment is made by Mar 22 (e.g Mar 22):

Under the perpetual inv system, Merc. Inv account is usedto record purchase disc.

If payment is made after Mar 22:

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Mar 22 Accounts Payable 3,000

Cash 2,940

MerchandiseInventory

60

Mar 22 Accounts Payable 3,000

Cash 3,000

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Purchase Transaction Returns &Allowances Buyer returns merchandise that is damaged or

does not meet the specifications of the order Seller makes adjustment to the original purchase

price purchases allowances

3030

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Example May 2: Purchased merchandise on account from

Delta, RM5,000, terms 2/20, n/30. May 4: Returned RM3,000 of the merchandise. May 12: Paid the amount due.

* Payment is made within 20 days, therefore buyeris entitled for 2% discount.

3131

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May 2Merchandise Inventory 5,000

Accounts Payable Delta 5,000(Purchase of merch. onaccount)

4Accounts Payable - Delta 3,000

Merchandise Inventory 3,000

(Return of merchandise)

12Accounts Payable - Delta 2,000

Cash [98% x (5k 3K)] 1,960

Merchandise Inventor 40

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3333


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Transportation costs

3333

3434


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Example June 15: Sold merchandise on account to Kranz, RM700,terms FOB destination. The cost of the merchandise soldis RM480. Transportation cost was RM40.

3434

June 15Accounts Receivable 700

Sales 700

Cost of Merchandise Sold 480

Merchandise Inventory 480

Delivery TransportationEx ense 40

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Example June 20: Sold merchandise on account to Planter,RM800, terms FOB shipping point. The cost of themerchandise sold is RM360. The seller prepaid thetransportation cost of RM45.

3535

June20

Accounts Receivable 800

Sales 800Cost of Merchandise Sold 360

Merchandise Inventory 360

Accounts Receivable 45

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3 3

18


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Example

Augt 12: Sold merchandise on account to Lemon, RM100.The sales tax is 6% sales.

Sept 15: Seller remits RM2,900 of sales taxes collected tothe tax authority.

Aug 12Accounts Receivable 106

Sales 100Sales taxes Payable 6

Sep 15Sales Taxes Payable 2,900

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Trade Discounts

When wholesalers offer special discounts tocertain classes of buyers that order large

quantities, these discounts are called tradediscounts.

Not recorded in the accounts (the amount in the

account is after deducting trade discounts)

6-3

4040


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Dual Nature of Merchandise

Transactions Each merchandising transaction affects abuyer

and a seller

The same transaction would be recorded by boththe seller and the buyer Example: Sali sold merchandise on account to

Balan, RM7,500, terms FOB shipping point, n/45.

The cost of the merchandise sold was RM4,500.

4141


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Salis (seller) journal

Balans (buyer) journal

Refer to the full illustration in the text book Refer Example Exercise 4-6

Accounts Receivable Bayar 7,500

Sales 7,500Cost of merchandise sold 4,500


Merchandise Inventory 7,500Accounts Payable Sali 7,500

4242


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Describe the adjusting and closing processfor a merchandising business

Objective 4

4343


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Inventory Shrinkage

Loss of inventory due to shoplifting, employeetheft, or errors in recording or counting

inventory. If the balance of theMerchandise Inventory

account is larger than the amount of merchandisecount, the difference is often called inventory

shrinkage or inventory shortage.

4444


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Example NetSolutions inventory records indicate that RM63,950 ofmerchandise should be available for sale on December 31,2009. However, the physical count reveals that onlyRM62,150 is actually available.

Dec

31

Cost of Merchandise Sold 1,800


(Adjusting entry to record inv.shrinkage; RM63,950 RM62,150)

4545


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Closing entries Similar with those of service businesses

4646


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Closing entries Refer to the textbook for an example of closing

entries.

4747


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APPENDIX 1 The Periodic InvSystem

There is no perpetual record for merchandiseinventory and cost of merchandise sold

Closing inventory is determined by physical countat the end of the period

Refer Exhibit 12

Cost of merchandise sold

= Opening inv + Purchases Closing inv

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Perpetual vs Periodic Inv System

Journal entries for transactions would differbetween the two systems

Main advantage of the perpetual inventory systemprovides continuous and updated record of

merchandise inventory and cost of merchandisesold

Refer Exhibit 14

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