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Financial Accounting:
Tools for Business Decision Making
Kimmel, Weygandt, Kieso
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Chapter 5
Merchandising Operations
After studying Chapter 5, you should be able to
:
Identify the differences between a service enterprise and a
merchandising company.
Explain the recording of purchases under a perpetual inventory
system.
Explain the recording of sales revenues under a perpetual inventory
system.
Identify the unique features of the financial statements for a
merchandising company.
Merchandising
companies buy
and sell
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Differences Between a Service Enterprise
and a Merchandising Company
In a merchandising company, the primary source of
revenues is the sale of merchandise, referred to as
sales
revenue
or sales.
Unlike expenses for a service company, expenses for a
merchandising company are divided into two categories:
Cost of goods sold
- the total cost of merchandise sold
during the period.
Operating expenses
- selling and administrative
Terms
Sales revenue or sales
= sale of
merchandise
Cost of goods sold
= total cost of
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Sales
Revenue
Cost of
Goods Sold
Gross
Profit
Operating
Expenses
Net Income
(Loss)
Less Less Equals EqualsHow Income is Measured in a
Merchandising Company
Sales revenues
Sales $ 480,000 Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000
Net sales 460,000
Cost of goods sold 316,000
Gross profit 144,000
Operating expenses
Store salaries expense 45,000 Rent expense 19,000 Utilities expense 17,000 Advertising expense 16,000
Depreciation expense 8,000 Freight-out 7,000 Insurance expense 2,000
Total operating expenses 114,000
Net Income $ 30,000
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
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Operating cycle of a
company is...
the average time it takes to
go from cash to cash in
producing revenues.
Operating cycle of a
merchandising
company is...
ordinarily longer than than
that of a service company;
purchase of merchandise and
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Receive Cash
Receive Cash
Perform Services
Buy Inventory
Sell Inventory
Service Company
Merchandising Company
Cash
Cash
Accounts ReceivableAccounts Receivable
Merchandise Inventory
Inventory Systems
Perpetual
- detailed inventory system in
which the cost of inventory is maintained
and the records continuously show the
inventory that should be on hand
Periodic
-inventory system in which
detailed records are not maintained and
the cost is goods sold is determined only
at end of accounting period
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Cost of Goods Sold Computed
Cost of Goods Sold
Computed Perpetual
Periodic Perpetual
Point of Sale Item Sold
Inventory
Purchased Item Sold Point of Sale
End of Period
Comparing Periodic and
Perpetual Inventory Systems
Inventory Purchased
End of Period
and
electronic
scanners
have
enabled
many
companies
to install
perpetual
What Is Charged to
Merchandise Inventory?
All Costs of getting the inventory to
company and ready to sell
+Freight-In
+Special Permits
Only costs associated with merchandise
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Merchandise Purchases
On May 4 the company bought $ 3,800
worth of merchandise from PW Audio
Supply, Inc.
•
1. Seller
•
2.Invoice
Date
•
3.Purchaser
•
4.Salesperso
n
•
5.Credit
terms
•
6.Freight
terms
•
7.Goods
sold: catalog
no.,descriptio
n,quantity,
price per unit
•
8.Total
Invoice No. 731
Address 125 Main Street
Attention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
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Merchandise Purchases
On May 4 the company bought $ 3,800
worth of merchandise from PW Audio
Supply, Inc.
GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account
Accounts
Payable
Merchandise
Inventory
May 4 3,800
Freight-out
Purchases Returns and Allowances
On May 8 the company returned $300 worth
of merchandise to PW Audio Supply, Inc.
GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300
Accounts
Payable
Merchandise
Inventory
May 4 3,800
Freight-out
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Freight Costs - On Incoming Inventory
On May 6 the company paid $ 150 to have
the merchandise inventory delivered to
them.
GENERAL JOURNAL Debit Credit May 6 Merchandise Inventory 150
Freight-Out
Merchandise
Inventory
May 4 3,800
Cash
May 6 150 May 8 300
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Freight Costs-on outgoing inventory
On May 6 the seller company paid $ 150 to
have merchandise inventory delivered to
the buyer.
GENERAL JOURNAL Debit Credit May 6 Freight-Out 150
Cash 150
Freight-Out
Merchandise
Inventory
Cash
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Purchase Discounts
•
Credit terms of a purchase on account may
permit the buyer to claim a cash discount for
prompt payment.
•
Credit terms specify the amount of cash discounts
and the time period during which it is offered.
•
2/10,n/30
•
1/10 EOM
Purchases Discounts
Review
- Company purchased $3800 of merchandise
and returned $300. The credit terms are 2/10, n/30
and the invoice was paid within the discount period
Original Invoice $3,800
-Returns 300
Amount due before discount $3,500
Purchases Discounts
Review
- Company purchased $3800 of merchandise
and returned $300. The credit terms are 2/10, n/30
and the invoice was paid within the discount period.
GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500
Cash 3,430 Merchandise Inventory 70
To record payment within discount period.
Accounts
Payable
Merchandise
Inventory
May 4 3,800
Cash
May 4 3,800 May 8 300 May 8 300
May 14 70 May 14 3,500
Sales Invoice ...
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•
1. Seller
•
2.Invoice Date
•
3.Purchaser
•
4.Salesperson
•
5.Credit terms
•
6.Freight
terms
•
7.Goods sold:
catalog
no.,description,
quantity, price
per unit
•
8.Total invoice
price
Invoice No. 731
Address 125 Main Street
Attention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date 8/4/98 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
Sales Revenues
-Under a Perpetual
System
are recorded when earned-revenue
recognition principle
must be supported by a business
document-written evidence
2 entries are made for each sale
one to record sale
Sales - under a perpetual system
Assume a CASH sale of $ 2,200
Cash
Accounts
Receivable
Merchandise
Inventory
Cost of Goods
Sold
Sales Returns &
Allowances
Sales
May 4 2,200
May 4 2,200
May 4 1.400
May 4 1.400
Sales Returns and Allowances
Flip side of purchase returns and
allowance
On buyer’s books
GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account
On seller’s books
Sales - under a perpetual system
Assume a sale of $ 3,800 ON ACCOUNT
Cash
Accounts
Receivable
Merchandise
Inventory
Cost of Goods
Sold
Sales Returns &
Allowances
Sales
May 4 3,800
May 4 2,400
May 2,400
For merchandise having a cost of $2 ,400
What Is the Sales Returns
and Allowances Account?
Contra Revenue Account
to sales
Used to show how much came in on returns
and allowances
Excessive returns and allowances suggest:
inferior merchandise
inefficiencies in filing orders
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What Is the Sales Discount
Account?
Contra Revenue Account
to sales
Used to disclose amount of cash discounts
Sales Discounts
Flip side of purchase discounts
On buyer’s books
GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70
To record payment within discount period
On seller’s books
GENERAL JOURNAL Debit Credit May 14 Cash 3,430
Sales revenues
Sales $ 480,000 Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000
Net sales 460,000
Cost of goods sold 316,000
Gross profit 144,000
Operating expenses
Store salaries expense 45,000 Rent expense 19,000 Utilities expense 17,000 Advertising expense 16,000
Depreciation expense 8,000 Freight-out 7,000 Insurance expense 2,000
Total operating expenses 114,000
Net Income $ 30,000
PW AUDIO SUPPLY, INC.
Income Statement (Partial)
For the Year Ended December 31, 1998
Gross Profit Rate=
Gross Profit
Net Sales
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Operating Expenses To
Sales Ratio=
Operating Expenses
Net Sales
Many companies have improved the
efficiency of their operations, thus
reducing the ratio of operating
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