session 6 merchandising1

Merchandising 1

Merchandising Operations

Comparison of Income Statements Operating Cycle of a Merchandising

Business Purchase Transaction

Terms of Transactions Inventory Systems Sales Transactions

Net Sales/Gross Sales Cost of Goods Sold

Net Purchases Operating Cost

Comparison of Income Statement Net sales arise from the sale of goods Cost of goods sold represents the cost

of inventory, the entity has sold to customers

Gross margin from sales (gross profit) Difference between net sales and cost of

goods sold

Operating expenses – other that cost of goods sold, which are incurred to generate sales

Operating Cycle of a Merchandising Business Purchases inventory, sells the

inventory and uses the cash to purchase more inventory

The faster the sale of inventory and the collection of cash, the higher the profits

Source Documents

Sales invoice Bill of landing Statement of account Official receipt Deposit slip Check Purchase requisition Purchase order Receiving report Credit memorandum

Steps in purchase transaction1. Fills a purchase requisition form and sends to

purchasing department2. Purchasing department prepares a purchase

order after checking descriptions3. Seller forwards an invoice to the purchaser

upon shipment of the merchandise4. The purchaser’s receiving department sees

to it that the terms in the purchase order are complied with and prepares a receiving report

5. Before approval of invoice payment, the AP department compares copies to the previous documents

Terms of Transactions

Merchandise may be purchased and sold either on credit terms or for cash on delivery

When goods are sold on account, a period of time called credit period is allowed for payment

If the credit period is 30 days, then payment is expected within 30 days from the invoice date

Described as the net credit period on net tems 30 days is noted as “n/30” 10 days after the end of the month “n/10 eom”

Cash Discounts

For prompt payment (called cash discount) This practice improves the seller’s cash

position by reducing the amount of money is accounts receivable

Designed by such notation as “2/10” The buyer may avail of two percent discount if

the invoice is paid within ten days from the invoice date

10 days (discount period) covered by the discount

Cash discounts are called purchase discount from the buyer’s view point and sales discount from the seller’s point of view.

example

Cash Discount of 2% on P150,000 3,000

Interest for 20 days at an annual rate of 18% on the amount due within the discount period:

P147,000 * 18% * 20/360

Savings effected by barrowing 1,470

Amount due = 150,000 invoice price – 3,000 cash discounts

1,530

Trade Discount

Encourage the buyers to purchase products because of markdown from the list price

Enables the suppliers to vary prices periodically without the inconvenience of revising price lists and catalogs

There is no trade discount account, instead, all accounting entries are based on the invoice price which is obtained by subtracting the trade discount from the list price

Transportation Cost

Freight bill designates which party shoulders the costs, and whether the shipment is freight prepaid or freight collect

FOB (free on board) Shipping point: the buyer shoulders the

shipping costs; ownership over the goods passes from seller to the buyer.

Buyer already owns the goods while still in transit and therefore, shoulders the transportation cost

FOB Destination The seller bears the shipping cost Title passes only when the goods are

received by the buyer at the point of destination; while in transit

The seller is still the owner of the goods so the seller shoulders the transportation costs

Freight prepaid The seller pays the transportation costs

before shipping the goods sold Freight collect

The freight company collects from the buyer

Payments by either party will not dictate who should ultimately shoulder the costs

Freight termsWho

shoulders the Tc?

Who Pays the Shipper?

FOB Destination, Freight Prepaid Seller Seller

FOB Shipping Point, Freight Collect Buyer Buyer

FOB Destination, Freight Collect Seller Buyer

FOB Shipping Point, Freight Prepaid Buyer Seller

Shipping cost borne by the buyer using the periodic inventory system are debited to transportation in account

Shipping cost borne by the seller are debited to transportation out account, also called delivery expense, an operating expense in the income statement

Inventory Systems

Key factor in determining cost of goods sold

Merchandising inventory represents goods available for sale, there must be method of determining both the quantity and the cost of these goods.

Periodic Inventory or Perpetual Inventory

Periodic Inventory System Primarily used by businesses that sell

relatively inexpensive goods and that are not yet using computerized scanning system to analyze good sold

No entries are made to the inventory account as the merchandise is bought and sold

When goods are purchased, a separate set of accounts is used to accumulate information on the net cost of the purchases

Only at the end of the period, when the inventory is counted, will entries be made to the inventory account to establish its proper balance

Perpetual Inventory System Inventory account is continuously updated Perpetually updating the inventory

account requires that at the time of purchase, merchandise acquisitions be recorded as debit to the inventory account.

At the time of sale, the cost of goods sold is determined and recorded by a debit to the cost of goods sold account and a credit to the inventory account

Both the inventory and cost of goods sold accounts receive entries throughout the accounting period.

POS scanners built into checkout counters to collect transactional data for the cash register and to update their perpetual inventory system

Is more advisable for forms that sell low-volume, high-priced goods

The ending inventory should reconcile with the actual physical count at the end of the period assuming that no theft, spoilage, or error has occurred

account is adjusted for any inaccuracies discovered

The count provides as independent check on the amount of inventory that should be reported at the end of the period

Net Sales

Net sales is the first part of the merchandising income statement as presented below

Net Sales

Gross Sales 2,463,500

Less: Sales Returns and Allowances

27,500

Sales Discount 42,750 70,250

Net Sales 2,393,250

Gross Sales

Under accrual accounting, revenues form the sale of merchandise are considered to be earned in the accounting period in which the title of goods passes-usually at the point of delivery – from the seller to the buyer

Gross sales consist of total sales for cash and on credit during an accounting period

Cash for sale is uncollected, the revenue is recognized as earned at the time of sale

As an income account, the sales account is credited whenever sales on account or cash are made.

Only sales of merchandise held for resale are recorded in the sales account

If the firm sold one of its delivery trucks, the credit would be made to the delivery equipment account, not to sales account

9-16 Cash 25,000Sales 25,000

To record sale of merchandise for cash

9-16 Accounts Receivable 25,000Sales 25,000

To record sale of merchandise on credit

Sales Discount

Assume that Corleto delights sold merchandise on 9-20 for P30,000; terms 2/10, n/60. at the time of sale, the entry

9-20 Account Receivable 3,000Sales 3,000

To record sales on credit; terms 2/10, n/60

The customer may take advantage of the sales discount any time on or before 9-30, which is 10 days after the date of the invoice

9-30 Cash 2,940

Sales Discounts 60Accounts Receivable 3,000

To record collection on the 9-20 sale, discounts taken.

• At the end of the accounting period, the sales discounts account has accumulated all the sales discount for the period.

• The account is considered a contra-income account and deducted from gross sales in the income statement.

Sales Returns and Allowances The buyer may return the goods to the

seller for credit if the sale was made on account or for cash refund if the sale was for cash

The seller may just grant an allowance or deduction from the selling price

A high sales returns and allowances figure is not commendable because it may signal poor quality of goods and thus may result to dissatisfied customers

Each return or allowance is recorded as a debit to an account called sales returns and allowances.

9-17 Sales Returns and Allowances

760

Accounts Receivable (or Cash)

760

To record return or allowance on unsatisfactory merchandise

• The seller usually issues the customer a credit memorandum, which is a formal acknowledgement that the seller has reduced the amount owned by the customer.

• Sales returns and allowances is a contra-income account and is accordingly deducted from gross sales in the income statement

Transportation Out

When the freight term is FOB destination, the seller shoulders the transportation costs; when the term is FOB shipping point, the buyer bears the shipping costs

11-25 Accounts Receivable 17,000

Transportation Out 1,900

Sales 17,000

Cash 1,900

Sales on account; terms 2/10, n/30; FOB destination, freight prepaid, P1,900

Case1: Assume that an entity sold merchandise totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900

12-5 Cash 16,600

Sales Discount 340

Accounts Receivable 17,000

If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%). Transportation out is an operating expense.


Sales 17,000Sold merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.

Case2: Assume that an entity sold merchandise totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900

12-5 Cash 16,600

Sales Discount 340


If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%).


Transportation out 1,900

Sales 17,000Sales on account; terms 2/10, n/30; FOB destination, freight collect, P1,900

Case3: Assume that an entity sold merchandise totaling P17,000 FOB destination, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900

12-5 Cash 14,760

Sales Discounts 340


If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%) since the discount applies to total sales

11-25 Accounts Receivable 18,900Sales 17,000

Cash 1,900Sales on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900

Case4: Assume that an entity sold merchandise totaling P17,000 FOB shipping point, freight perpaid; terms 2/10, n/30. the transportation cost amounted to P1,900

12-5 Cash 18,560

Sales Discounts 340


If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%) since the discount applies to total sales

Cost of Goods Sold

Or cost of sales is the largest single expense of the merchandising business

Cost of inventory that the entity has sold to customers

Goods available for sale during the year = merchandise inventory at the beginning of the year + net purchases during the period

Entity sold all goods available for sale during a given acctg period, cost of goods sold = goods that had been available for sale

Actual cost of goods sold = goods available for sale - merchandise inventory at the end of the period

Corleto Delights

Partial Income Statement

For the Year Ended Dec. 31, 2000

Cost of Goods Sold

Merchandise Inventory, 1/1/00 528,000

Purchases 1,264,000

Less: Purchases Returns and Allowances 56,400

Purchases Discounts 21,360 77,760

1,186,240

Transportation In 82,360

Net Purchases 1,268,600

Goods Available for Sale 1,796,600

Less: Merchandise Inventory, 12/31/00 483,000

Cost of Goods Sold 1,313,600

Merchandise inventory

Consists of goods purchased for resale. Beginning inventory = merchandise

inventory at the start of the acctg period

Ending inventory = inventories at the end Merchandise inventory to be reported in

the balance sheet Beginning inventory of the next acctg

period

Net Purchases

Under periodic inventory method Net purchases = GP – (Pdra) + Tc

GP: gross purchases Pdra: purchases discounts, returns,

allowances Tc: transportation costs

Purchases Purchases account, a temporary

account, is used only for merchandise purchased for resale

Purpose: accumulate the total cost of merchandising purchased during an accounting period

At invoice price is known as the gross price method of recording purchases

11-12 Purchases 15,000

Accounts Payable 15,000To record purchases of merchandise; term 2/10, n/30.

All purchases of merchandise are debited to the purchases account as shown below

Purchases Returns and Allowances Is a contra account and is accordingly

deducted from purchases in the income statement

Cost that cannot be recovered, or lost sales resulting from poor ordering or unsaleable goods

11-14 Accounts Payable 2,000

Purchases R&A 2,000Return of damaged merchandise purchased on Nov 12.

Sales R&A in the seller’s books are recorded as purchases returns and allowances in the books of the buyer

Purchases Discounts Purchases are usually made on credit

and commonly involve purchases discounts for early payment

Is a contra account that is deducted from purchases on the income statement

Does not apply to transportation or other charges that might appear on the invoice


Purchases discount 260

Cash 12,740Record Purchases discount of (P13,000 * 2%)

In relation with the purchase last Nov 12, discount terms 2/10, n/30, and Nov 14 Purchases R&A


Account Payable 17,000Purchased merchandise on account; terms 2/10, n/30; FOB destination, freight prepaid

Case1: Assume that an entity made purchases totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900

Transportation IN


Purchase Discount 340

Cash 16,600

No debit to transportation in account since the shipping term provided that the seller should shoulder the transportation cost.

If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%).


Transportation In 1,900

Accounts Payable 17,000

Cash 1,900Purchase merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.

Case2: Assume that an entity purchases merchandise totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900


Purchases Discounts 340

Cash 16,660

If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%).

Transportation in will form part of net purchases.


Account Payable 15,100

Cash 1,900Purchases on account; terms 2/10, n/30; FOB destination, freight collect, P1,900

Case3: Assume that an entity made purchases totaling P17,000 FOB destination, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900



Cash 14,760

Accounts payable is decreased by the transportation charges paid by the buyer for the benefit of the seller

If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%) since the discount applies to total purchases


Transportation In 1,900Accounts Payable 18,900

Purchased merchandise on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900

Case4: Assume that an entity purchases merchandise totaling P17,000 FOB shipping point, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900



Cash 18,560

If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%) since the discount applies to total sales

Buyer not entitled to discounts on the transportation costs.

Discounts apply only to total purchases.

Operating Expenses

Make up the third major part of the income statement for a merchandising entity

Expenses other than the cost of goods sold, which are incurred to generate income from the entity’s ,major line of business-merchandising

Categories: Selling, Administrative, Other operating expenses

Selling: related directly to the entity’s efforts to generates sales Payroll accounts, advertising, traveling, store

supplies used, depreciation, transportation out

Administrative: related to the general administration of the business Officers and office salaries, office supplies,

depreciation, business taxes, professional services, uncollectible accounts and other general office expenses

Other operating: are not related to the central operations of the business Expenses and loses from peripheral or

incidental transactions of the enterprise; for example, loss on sale of investments or loss on sale of property and equipment