Accounting for Merchandising Businesses

Chapter 4

Service Businesses vs. Merchandise Operations

• Merchandise Operations– Revenue activities involve the buying

and selling of merchandise.– Example: Home Depot Inc.

• Service Businesses• Revenue activities involve providing services to customers.

• Example: Family Health Care, P.C.

H&R BLOCKCondensed Income Statement

For the Year Ending April 30, 2007(in millions)

Revenue $3,002Operating expenses 2,537Operating income $ 465Other income 8Income before taxes $ 473Income taxes 196Net income $ 277

H&R BLOCKCondensed Income Statement

For the Year Ending April 30, 2007(in millions)

Revenue $3,002Operating expenses 2,537Operating income $ 465Other income 8Income before taxes $ 473Income taxes 196Net income $ 277

Best BuyCondensed Income StatementFor the Year Ending December 28, 2007

(in millions)

Net sales $45,738Cost of merchandise sold 32,057Gross profit $13,681Operating expenses 9,490Operating income $ 4,191Other income 26Income before taxes $ 4,217Income taxes 1,636Net income $ 2,581

Best BuyCondensed Income StatementFor the Year Ending December 28, 2007

(in millions)

Net sales $45,738Cost of merchandise sold 32,057Gross profit $13,681Operating expenses 9,490Operating income $ 4,191Other income 26Income before taxes $ 4,217Income taxes 1,636Net income $ 2,581

What’s different on a What’s different on a merchandising income statement?merchandising income statement?

What’s different on a What’s different on a merchandising income statement?merchandising income statement?

PurchasesPurchasesPurchasesPurchases

Purchases $521,980Less: Purchases returns and allowances $9,100

Purchases discounts 2,525 11,625Net purchases $510,355Add transportation-in 17,400 Cost of merchandise purchased $527,755

Detailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold SectionDetailed Cost of Merchandise Sold Section

Merchandise inventory, Jan. 1, 2010 $ 59,700Purchases $521,980Less: Pur. returns and allow. $9,100

Purchases discounts 2,525 11,625Net purchases $510,355Add transportation-in 17,400 Cost of merchandise purchased 527,755Merchandise available for sale $587,455Less merchandise inventory, Dec. 31, 2010 62,150Cost of merchandise sold $525,305

Sales TransactionsSales TransactionsSales TransactionsSales Transactions

On January 3 Fisher Company sells merchandise costing $3,000 for $5,000. The sale is made

a. For cash

b. On account

Sales DiscountsSales DiscountsSales DiscountsSales Discounts

3/10, n/30

Credit Terms

…the account is paid within 10

days.

Sales DiscountsSales DiscountsSales DiscountsSales Discounts

On January 12 Fisher Company sells merchandise on account to Omega Tech for $4,000. Credit

terms are 3/10, n/30. Omega Tech pays within the discount period.

4-14

Sales Returns and AllowancesSales Returns and AllowancesSales Returns and AllowancesSales Returns and Allowances

On January 13 Fisher Company issues a $1,000 credit memorandum to Krier Company for

merchandise that was returned. The merchandise (cost $600) was sold on account.

Purchase TransactionsPurchase TransactionsPurchase TransactionsPurchase Transactions

On January 6 Fisher Company purchased $6,000 of merchandise on account (terms:

2/10, n/30) from Quantum Company. Recall that Fisher Company uses the perpetual

system.

4-16

Purchase Returns and AllowancesPurchase Returns and AllowancesPurchase Returns and AllowancesPurchase Returns and Allowances

On January 9 Fisher Company returns $2,000 of merchandise purchased from

Quantum Inc.

Purchase DiscountsPurchase DiscountsPurchase DiscountsPurchase Discounts

On January 15, Fisher Company pays the amount due to Quantum

Sales and Purchase Transactions

Based on the information below, illustrate the effects on the accounts and financial statements (Balance Sheet and Income Statement) of the seller and buyer:(a)Seller sells Buyer on account merchandise costing $300 for $500, terms 2/10, net 30.(b) Buyer returns as defective $100 worth of the $500 merchandise received. The seller’s cost of this merchandise is $60.(c) Buyer pays within the discount period.

Freight

Transportation CostsTransportation CostsTransportation CostsTransportation Costs

On January 19 Fisher Company buys merchandise from Data Max on account, $2,900, terms FOB shipping point, and prepays the transportation cost of $150. Illustrate the effect on the accounts and

financial statements related to these transactions.

Sales Taxes

When sale is made, liability for sales tax is recorded as an obligation by the

seller

When sale is made, liability for sales tax is recorded as an obligation by the

seller

Payment is made to state taxing

authority to satisfy obligation

Payment is made to state taxing

authority to satisfy obligation

Fisher Company’s records on December 31, 2007 show that the book inventory of merchandise is $70,100. The physical inventory taken on that date indicates that the value of the inventory is

$69,800. What is the effect of this shrinkage on the accounts and financial statements?

Inventory ShrinkageInventory ShrinkageInventory ShrinkageInventory Shrinkage

Inventory Shrinkage

Nocturnal Company’s perpetual inventory records indicate that $417,200 of merchandise should be on hand on October 31, 2011. The physical inventory indicates that $400,680 of merchandise is actually on hand. Illustrate the effects on the accounts and financial statements of the inventory shrinkage for Nocturnal Company for the year ended October 31, 2011.