NetSolutions Income Statement For the Year Ended December 31, 2007

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Accounting for

Merchandising Businesses

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Chapter

6

Accounting for

Merchandising Businesses

Accounting, 21st_Edition

Warren Reeve Fess

PowerPoint Presentation by Douglas Cloud

Professor Emeritus of Accounting Pepperdine University

Task Force Image Gallery clip art included in this electronic presentation is used with the

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Some of the action has been automated, so click the mouse when you see this

lightning bolt in the lower right-hand corner of the screen. You can point and

click anywhere on the screen.

Some of the action has been automated, so click the mouse when you see this

lightning bolt in the lower right-hand corner of the screen. You can point and

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1. Distinguish the activities of a

service business from those of a merchandising business.

2. Describe and illustrate the fnancial statements of a merchandising

business.

3. Describe the accounting for the sale of merchandise.

4. Describe the accounting for the purchase of merchandise.

Objectives

After studying this chapter, you should

be able to:

After studying this chapter, you should

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5. Describe the accounting for

transportation costs, sales taxes, and trade discounts.

6. Illustrate the dual nature of merchandising transactions.

7. Prepare a chart of accounts for a merchandising business.

8. Describe the accounting cycle for a merchandising business.

9. Compute the ratio of net sales to assets as a measure of how

efectively a business is using its assets.

Objectives

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Service Business

Fees earned $XXX

Operating expenses –XXX

Net income $XXX

Nature of Businesses

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Merchandising Business

Sales $XXX

Cost of Merchandise Sold –XXX

Gross Profit $XXX

Operating Expenses –XXX

Net Income $XXX

Nature of Businesses

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Multiple-Step

Income

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Revenue from sales: Sales $720,185

Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930

Net sales $708,255

Cost of merchandise sold 525,305 Gross proft $182,950

NetSolutions

Income Statement For the Year Ended December 31, 2007

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Operating expenses: Selling expenses:

Sales salaries expense $56,230 Advertising expense 10,860

Depr. Expense–store equipment3,100 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses:

Ofce salaries expense $21,020 Rent expense 8,100

Depr. expense–ofce equipment 2,490 Insurance expense 1,910

Ofce supplies expense 610

Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240

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Other income and expenses: Rent revenue $ 600

Interest expense (2,440) (1,840) Net income $75,400

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Periodic vs. Perpetual Methods of

Accounting

Periodic vs. Perpetual Methods of

Accounting

Periodic Method

•_{A method of determining the cost of merchandise}

sold and the amount of merchandise on hand

•_{Under this method, the inventory records do not}

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•_{Under this method, each purchase and sale of}

merchandise is recorded in the inventory and the cost of merchandise sold accounts.

•_{The amount of merchandise available for sale}

and the amount sold are continuously disclosed in the inventory records.

Periodic vs. Perpetual Methods of

Accounting

Periodic vs. Perpetual Methods of

Accounting

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Cost of Merchandise Purchased

Purchases $521,980

Less: Purchase returns and

allowances $9,100

Purchase discounts 2,525 11,625

Net purchases $510,355

Add transportation-in 17,400

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Cost of Merchandise Sold

Merchandise inventory, 1/1/07 $ 59,700

Purchases $521,980

Less: Purchase returns and

allowances $9,100

Purchase discounts 2,525 11,625

Net purchases $510,355

Add transportation-in 17,400

Cost of merchandise purchased 527,755

Merchandise available for sale $587,455

Less merchandise inventory, 12/31/07 62,150

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Single-Step Income

Statement for a

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Revenues:

Net sales $708,255

Rent revenue 600

Total revenues $708,855 Expenses:

Cost of merchandise sold $525,305 Selling expenses 70,820

Administrative expenses 34,890 Interest expense 2,440

Total expenses 633,455 Net income $ 75,400

NetSolutions Income Statement

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Statement of

Owner’s Equity for

a Merchandising

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Chris Clark, capital, 1/1/07 $153,800 Net income for year $75,400

Less withdrawals 18,000

Increase in owner’s equity 57,400 Chris Clark, capital, 12/31/07 $211,200

NetSolutions

Statement of Owner’s Equity

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Assets

Current assets:

Cash $52,950

Accounts receivable 91,080

Merchandise inventory 62,150 Ofce supplies 480

Prepaid insurance 2,650 Total current assets $209,310

NetSolutions Balance Sheet December 31, 2007

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Property, plant, and equipment: Land $20,000

Store equipment $27,100 Less accumulated

depreciation 5,700 21,400 Ofce equipment $15,570

Less accumulated

depreciation 4,72010,850 Total property, plant, and equipment 52,250

Total assets $261,560

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Liabilities

Current liabilities:

Accounts payable $22,420

Note payable (current portion) 5,000 Salaries payable 1,140

Unearned rent 1,800

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

Note payable (due 2017) 20,000 Total liabilities $ 50,360

Owner’s Equity

Chris Clark, capital 211,200

Total liabilities and owner’s equity $261,560

Liabilities

Current liabilities:

Accounts payable $22,420

Note payable (current portion) 5,000 Salaries payable 1,140

Unearned rent 1,800

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

Note payable (due 2017) 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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Sales Transactions

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JOURNAL

To record cash sales.

On January 3, a firm sold $1,800 of merchandise for cash.

Cash Sales

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Cash Sales

Using a perpetual inventory, the inventory

cost of $1,200 must be recorded.

Using a perpetual inventory, the inventory

cost of $1,200 must be recorded.

6 7 8 9

3 Cost of Merchandise Sold 1 280 00

Merchandise Inventory 1 280 00

To record the cost of merchandise sold.

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Credit card sales (MasterCard or Visa) are recorded as cash sales.

At the end of the month, $48 was sent to cover this service charge.

JOURNAL

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Jan. 12 Accounts Receivable—Sims Co. 510 00

Invoice No. 7172.

Sales 510 00

12 Cost of Merchandise Sold 280 00

Merchandise Inventory 280 00

Cost of merchandise sold on Invoice No. 7172.

Sales on Account

On January 12, a firm sold Sims Company merchandise on account, $510. The cost of

the merchandise to the seller was $280.

On January 12, a firm sold Sims Company merchandise on account, $510. The cost of

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Sales Discounts

The terms for when payments for merchandise are to be made are

called credit terms.

The terms for when payments for merchandise are to be made are

called credit terms.

If buyer is allowed an amount of time to pay, it is known as the credit period.

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If invoice is paid within

10 days of invoice date

Sales Discounts

Credit Terms

Invoice for $1,500 Terms: 2/10, n/30

$1,470 paid (less 2% as a cash

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If invoice is

NOT paid within 10

days of invoice date

Sales Discounts

Credit Terms

Invoice for $1,500 Terms: 2/10, n/30

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Sales Discounts

On January 21, the firm receives the amount due from Sims (refer to Slide

25), less the 2 percent discount.

On January 21, the firm receives the amount due from Sims (refer to Slide

25), less the 2 percent discount.

Jan. 21 Cash 499 80

Accounts Receivable—Sims Co. 510 00

Sales Discounts 10 20

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Sales Returns and Allowances

Merchandise that is returned to the vendor is referred to as a sales return.

If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as

a sales allowance.

If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as

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Jan. 13 Sales Returns and Allowances 225 00

Credit Memo No. 32.

Accounts Receivable—Krier Co. 225 00

13 Merchandise Inventory 140 00

Cost of Merchandise Sold 140 00 Cost of merchandise

returned—Credit Memo 32.

Sales Returns and Allowances

On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.

On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions.

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Purchase

Transactions

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Date Description

Jan. 3 Merchandise Inventory2007 2 510 00

Cash 2 510 00

Purchased inventory from Bowen Co.

Purchase Transactions

On January 3, Purchased merchandise for cash from Bowen Company, $2,510.

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What’s the last day the invoice

can be paid? What’s the last day the invoice

can be paid?

Purchase Discounts

Alpha Technologies issues an invoice for

$3,000 to

NetSolutions dated March 12, with terms

2/10, n/30.

Alpha Technologies issues an invoice for

$3,000 to

NetSolutions dated March 12, with terms

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Invoice period 30 Days in March 31

Date of invoice 12

Remaining days 19

April 11

Let’s do a simple calculation.

The full amount is due on April 11. The full amount is

due on April 11.

Purchase Discounts

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We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice

within the discount period?

We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice

within the discount period?

Purchase Discounts

$60 discount (2% x

$3,000)?

$60 discount (2% x

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Discount $60.00 Interest for 20 days

at the rate of 6%

on $2,940 –9.80

Savings from

borrowing $50.20

Let’s see… Interest on the amount due of $3,000 less

the 2 percent…

Let’s see… Interest on the amount due of $3,000 less

the 2 percent…

Purchase Discounts

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Looks like we should take

advantage of the discount even if we have to borrow the money.

Looks like we should take

advantage of the discount even if we have to borrow the money.

Purchase Discounts

Discount $60.00

Interest for 20 days at the rate of 6%

on $2,940 –9.80

Savings from

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JOURNAL

On March 12, NetSolutions purchased merchandise on account from Alpha

Technologies, $3,000.

On March 12, NetSolutions purchased merchandise on account from Alpha

Technologies, $3,000.

Mar. 12 Merchandise Inventory2007 3 000 00 Accounts Payable—Alpha

Technologies 3 000 00

Purchase Discounts

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JOURNAL

If payment is made by March 22 NetSolutions records the discount as a reduction in cost.

If payment is made by March 22 NetSolutions records the discount as a reduction in cost. Mar. 22 Accounts Payable—Alpha Technol. 3 000 00

Cash 2 940 00

Merchandise Inventory 60 00 2007

Purchase Discounts

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JOURNAL

If NetSolutions does not pay the invoice until April 11, it would pay the full amount.

Apr. 11 Accounts Payable—Alpha Technol. 3 000 00

Cash 3 000 00

2007

Purchase Discounts

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Purchases Returns and Allowances

A purchases return involves actually returning merchandise that is

damaged or does not meet the specifications of the order.

A purchases return involves actually returning merchandise that is

damaged or does not meet the specifications of the order.

When the defective or incorrect

merchandise is kept by the buyer and the vendor makes a price adjustment,

this is a purchases allowance. When the defective or incorrect

merchandise is kept by the buyer and the vendor makes a price adjustment,

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NetSolutions received the delivery from Maxim

Systems and determined that $900 of the items were not

the merchandise ordered. Debit memorandum #18 is

issued to Maxim Systems.

NetSolutions received the delivery from Maxim

Systems and determined that $900 of the items were not

the merchandise ordered.

Debit memorandum #18 is

issued to Maxim Systems.

Purchases Returns and Allowances

You sent me the wrong interface cards. We’ll send a debit memorandum with the

returned items.

You sent me the wrong interface cards. We’ll send a debit memorandum with the

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Mar. 7 Accounts Payable—Maxim Systems 900 00

Debit Memo No. 18

Purchases Returns and Allowances

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Purchases Returns and Allowances

On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link,

subject to terms 2/10, n/30.

May 2 Merchandise Inventory 5 000 00

Purchased merchandise.

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Purchases Returns and Allowances

On May 4, NetSolutions returns $3,000 of the merchandise.

May 4 Accounts Payable—Delta Data Links 3 000 00

Returned portion of merchandise purchased.

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Purchases Returns and Allowances

On May 12, NetSolutions pays the amount due.

May 12 Accounts Payable—Delta Data Links 2 000 00

Paid invoice.

Cash 1 960 00

Merchandise Inventory ($5,000 – _{$3,000) x} 40 00

2%

($5,000 – $3,000) x

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FOB Shipping Point

Buyer pays freight costs and debits Merchandise Inventory

Fruit Express

Title passes to buyer as shipment leaves

shipping point.

Title passes to buyer as shipment leaves

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June 10 Merchandise Inventory 900 00

Purchased merchandise, terms FOB shipping point.

Accounts Payable—Magna Data 900 00

10 Merchandise Inventory 50 00

Cash 50 00

Paid shipping cost .

On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.

On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping

point and pays the transportation cost of $50.

FOB Shipping Point

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FOB Destination

Title passes to buyer upon arrival at

destination.

Title passes to buyer upon arrival at

destination. Seller pays freight costs and debits

Transportation Out

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On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination.

The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.

FOB Destination

June 15 Accounts Receivable—Kranz Co. 700 00

Sold merchandise, terms FOB destination.

Sales 700 00

15 Cost of Merchandise Sold 480 00

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FOB Destination

June 15 Transportation Out 40 00

Cash 40 00

Paid shipping cost on merchandise sold.

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Sales Taxes

On August 12, merchandise is sold on account to Lemon Company, $100. The

state has a 6% sales tax.

On August 12, merchandise is sold on account to Lemon Company, $100. The

state has a 6% sales tax.

Aug. 12 Accounts Receivable—Lemon Co. 106 00

Sales 100 00

Sales Taxes Payable 6 00

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Sales Taxes

On September 15, the seller sends in a payment of $2,900 to the taxing unit for

the August taxes collected.

On September 15, the seller sends in a payment of $2,900 to the taxing unit for

the August taxes collected.

Sept.15 Sales Tax Payable 2 900 00

Cash 2 900 00

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45.

The cost of the merchandise sold was $4,500.

Scully Company (Seller)

Accounts Receivable—Burton Co. 7,500

Sales 7,500

Cost of Merchandise Sold 4,500

Merchandise Inventory 4,500

Burton Company (Buyer)

Merchandise Inventory. 7,500

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

No entry.

Merchandise Inventory 150

Cash 150

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

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

Sales 5,000

Merchandise Inventory. 5,000

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

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

Burton Company on July 5.

Transportation Out 250

Cash 250

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5

purchase on account. The cost of the merchandise was $700.

Sales Returns and Allowances 1,000

Cost of Merchandise Sold 700

Accounts Payable—Scully Co. 1,000

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

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

Cash 4,000

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.

Sales 12,000

Accounts Receivable—Burton Co. 500

Cash 500

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully

prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200.

Continued (Seller)

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Illustration of Accounting for

Merchandise Transactions

Illustration of Accounting for

Merchandise Transactions

July 28. Scully Company received payment from Burton Company for purchase of July

18, less discount (2% x $12,000).

Cash 12,260

Sales Discounts 240

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Balance Sheet Accounts

200 Liabilities

210 Accounts Payable 211 Salaries Payable 212 Unearned Rent 215 Notes Payable

300 Owner’s Equity

310 Chris Clark, Capital 311 Chris Clark, Drawing 312 Income Summary

100 Assets

110 Cash

112 Accounts Receivable 115 Merchandise Inventory 116 Office Supplies

117 Prepaid Insurance 120 Land

123 Store Equipment

124 Accumulated Depreciation— Store Equipment

125 Office Equipment

126 Accumulated Depreciation— Office Equipment

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Income Statement Accounts

600 Other Income

610 Rent Revenue

700 Other Expense

710 Interest Expense

400 Revenues

410 Sales

411 Sales Returns and Allowances

412 Sales Discounts

500 Costs and Expenses

510 Cost of Merchandise Sold 520 Sales Salaries Expense 521 Advertising Expense 522 Depreciation Expense—

Store Equipment 523 Transportation Out

529 Miscellaneous Selling Expense 530 Office Salaries Expense

531 Rent Expense

532 Depreciation Expense— Office Equipment

533 Insurance Expense

534 Office Supplies Expense

539 Miscellaneous Admin. Expense

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Merchandise Inventory

Shrinkage

Merchandise Inventory

Shrinkage

NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale

on December 31, 2007. The physical count reveals

that only $62,150 is actually available.

NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale

on December 31, 2007. The physical count reveals

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Merchandise Inventory

Shrinkage

Merchandise Inventory

Shrinkage

Dec. 31 Cost of Merchandise Sold 1 800 00

Merchandise Inventory 1 800 00 Adjusting Entry

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Profitability Measures -- Effective Use of Assets

Ratio of Net Sales to Assets

Sears Penney

Net sales $41,366,000 $31,846,000

Total assets:

Beginning of year $50,409,000 $19,742,000

End of year $44,317,000 $20,908,000

Average $47,363,000 $20,325,000

Ratio of net sales to assets .87 to 1 1.57 to 1

Ratio Use: To assess the effectiveness in the use of assets to generate sales.

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