accounting for merchandising operations
DESCRIPTION
Accounting for Merchandising Operations. Chapter. 5. Learning objective. Specialty of merchandising activities Accounting for merchandise purchasing Accounting for merchandise sales Completing Accounting cycle Financial statement format Decision Analysis: Current Ratio Acid-test ratio - PowerPoint PPT PresentationTRANSCRIPT
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Accounting for Merchandising Operations
Chapter
55
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Learning objectiveLearning objective
1. Specialty of merchandising activities2. Accounting for merchandise purchasing3. Accounting for merchandise sales4. Completing Accounting cycle5. Financial statement format6. Decision Analysis:
• Current Ratio• Acid-test ratio• Gross margin ratio
• Case: Walmart & Target
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1. Specialties of Merchandising Activities1. Specialties of Merchandising Activities
Merchandising companies Merchandising companies sell goodssell goods to earn revenue. to earn revenue.
Example: supermarketExample: supermarket
Merchandising companies Merchandising companies sell goodssell goods to earn revenue. to earn revenue.
Example: supermarketExample: supermarket
RevenuesRevenues ExpensesExpensesMinus Net
incomeNet
incomeEquals
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Manufacturer Wholesaler Retailer Customer
Merchandising CompaniesMerchandising Companies
Merchandising ActivitiesMerchandising Activities
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Reporting Income for a MerchandiserReporting Income for a Merchandiser
Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts
stores
Cost ofGoods Sold
GrossProfit
ExpensesNet
IncomeNet
SalesMinus Equals Minus Equals
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Operating Cycle for a MerchandiserOperating Cycle for a MerchandiserBegins with the purchase of merchandise and ends
with the collection of cash from the sale of merchandise.
Purchases
Merchandiseinventory
Credit sales
Accountreceivable
CashcollectionPurchases
Merchandiseinventory
Cashsales
Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale
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Inventory SystemsInventory Systems
+
+
BeginninginventoryBeginninginventory
Net cost ofpurchasesNet cost ofpurchases
Merchandiseavailable for sale Merchandiseavailable for sale
Ending InventoryEnding InventoryCost of Goods
SoldCost of Goods
Sold
==
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Inventory SystemsInventory Systems
Perpetual inventory system continuously updates accounting records for merchandising transactions — specifically, for those records of inventory available for sale and inventory sold.
Periodic inventory system updates the accounting records for merchandise transactions only at the end of a period. What are the disadvantages of periodic inventory system?
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2. Accounting for Merchandise Purchases2. Accounting for Merchandise Purchases
Trade discounts vs. purchase discounts Purchase returns and allowances Transportation costs
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Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/05 358-BI
Sold To
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000 We appreciate your business! Ship Chg. -
Tax - Total 27,000$
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
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Accounting for Merchandise PurchasesAccounting for Merchandise Purchases
On November 2, Z-Mart, purchased $1200 of Merchandise Inventory by paying cash.
On November 2, Z-Mart, purchased $1200 of Merchandise Inventory by paying cash.
Nov. 2 Merchandise Inventory . . . . . . . . . 1,200 Cash . . . . . . . . . . . . . . . . 1,200
Purchase merchandise for cash
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Trade DiscountsTrade Discounts
Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
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2/10,n/302/10,n/30
Purchase Discounts Credit termPurchase Discounts Credit term
Discount Percent
Discount Percent
Number of Days
Discount Is Available
Number of Days
Discount Is Available
Otherwise, Net (or All)
Is Due
Otherwise, Net (or All)
Is Due CreditPeriod
CreditPeriod
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Purchase DiscountsPurchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
A deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale
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Purchase DiscountsPurchase Discounts
On Nov 2, Z-Mart purchased $1200 of Merchandise Inventory on account, credit
terms are 2/10, n/30.
On Nov 2, Z-Mart purchased $1200 of Merchandise Inventory on account, credit
terms are 2/10, n/30.
Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200
Purchase merchandise on account
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Purchase DiscountsPurchase Discounts
On Nov. 12, Z-Mart paid the amount due on the purchase of Nov. 2.
On Nov. 12, Z-Mart paid the amount due on the purchase of Nov. 2.
$1,200 × 2% = $24 discount
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Purchase DiscountsPurchase Discounts
After we post these entries, the accounts involved look like this:
After we post these entries, the accounts involved look like this:
Merchandise Inventory Accounts Payable 11/02 1,200 11/02 1,20011/12 24 11/12 1,200
Bal. 1,176 Bal. 0
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Failure to Pay Within the Discount PeriodFailure to Pay Within the Discount Period
If we fail to take a 2/10, n/30 discount, is it really expensive?If we fail to take a 2/10, n/30 discount, is it really expensive?
365 days ÷ 20 days × 2% = 36.5% annual rate 365 days ÷ 20 days × 2% = 36.5% annual rate
Daysin ayear
Daysin ayear
Numberof additionaldays before
payment
Numberof additionaldays before
payment
Percentpaid to keep
money
Percentpaid to keep
money
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Purchase Returns and AllowancesPurchase Returns and Allowances
Purchase Return: Merchandise returned by the purchaser to the supplier.Purchase Allowance: A reduction in the cost of defective merchandise received by a purchaser from a supplier.
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Purchase Returns and AllowancesPurchase Returns and Allowances
On Nov. 9, Z-Mart purchased $20,000 of Merchandise Inventory on account, credit
terms are 2/10, n/30.
On Nov. 9, Z-Mart purchased $20,000 of Merchandise Inventory on account, credit
terms are 2/10, n/30.
Nov. 9 Merchandise Inventory 20,000 Accounts Payable 20,000
Purchased merchandise on account
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Purchase Returns and AllowancesPurchase Returns and Allowances
On Nov. 10, Z-Mart returned $500 of defective merchandise to the supplier.
On Nov. 10, Z-Mart returned $500 of defective merchandise to the supplier.
Nov 10 Accounts Payable 500 Merchandise Inventory 500
Returned defective merchandise
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Purchase Returns and AllowancesPurchase Returns and Allowances
On Nov. 18, Z-Mart paid the amount owed for the purchase of Nov 9.
On Nov. 18, Z-Mart paid the amount owed for the purchase of Nov 9.
Nov. 18 Accounts Payable 19,500 Cash 19,110 Merchandise Inventory 390
Paid account less discount
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Transportation CostsTransportation Costs
FOB shipping point(buyer pays)
FOB destination(seller pays)
Merchandise
Seller Buyer
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Transportation CostsTransportation Costs
On Nov. 12, Z-Mart purchased $8,000 of Merchandise Inventory for cash and also paid
$100 transportation costs.
On Nov. 12, Z-Mart purchased $8,000 of Merchandise Inventory for cash and also paid
$100 transportation costs.
Nov. 12 Merchandise Inventory 8,100 Cash 8,100
Paid for merchandise and transportation
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Quick Check Quick Check
On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The
shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will
be part of Buyer’s July 6 journal entry?
a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450
On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The
shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will
be part of Buyer’s July 6 journal entry?
a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450
FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
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Itemized Cost of Merchandise PurchasedItemized Cost of Merchandise Purchased
Invoice cost of merchandise purchases 235,800$ Less: Purchase discounts (4,200) Purchase returns and allowances (1,500) Add: Cost of transportation-in 2,300 Total cost of merchandise purchases 232,400$
Z-Mart.Total Cost of Merchandise Purchases
For Year Ended Dec 31, 2005Invoice cost of merchandise purchases 235,800$ Less: Purchase discounts (4,200) Purchase returns and allowances (1,500) Add: Cost of transportation-in 2,300 Total cost of merchandise purchases 232,400$
Z-Mart.Total Cost of Merchandise Purchases
For Year Ended Dec 31, 2005
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3. Accounting for Merchandise Sales3. Accounting for Merchandise Sales
Sales of merchandise Sales discounts Sales returns and allowances
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Accounting for Merchandise SalesAccounting for Merchandise Sales
Sales discounts and returns and allowances are Contra Revenue accounts.Sales discounts and returns and allowances are Contra Revenue accounts.
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Sales of MerchandiseSales of MerchandiseOn Nov. 3, Z-Mart sold $2,400 of merchandise on
credit. The merchandise was carried in inventory at a cost of $1,600.
On Nov. 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise was carried in inventory
at a cost of $1,600.
Nov. 3 Accounts Receivable 2,400 Sales 2,400
Sales of merchandise on credit
Cost of Goods Sold 1,600 Merchandise Inventory 1,600
To record cost of sales
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Sales DiscountsSales Discounts
On Nov. 12, Z-Mart sold merchandise costing On Nov. 12, Z-Mart sold merchandise costing $600 for $1,000 on account. Credit terms were $600 for $1,000 on account. Credit terms were
2/10, n/60. Let’s prepare the journal entries.2/10, n/60. Let’s prepare the journal entries.
On Nov. 12, Z-Mart sold merchandise costing On Nov. 12, Z-Mart sold merchandise costing $600 for $1,000 on account. Credit terms were $600 for $1,000 on account. Credit terms were
2/10, n/60. Let’s prepare the journal entries.2/10, n/60. Let’s prepare the journal entries.
Nov. 12 Accounts Receivable 1,000 Sales 1,000
Sales of merchandise on credit
Cost of Goods Sold 600 Merchandise Inventory 600
To record cost of sales
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Sales DiscountsSales Discounts
On Nov. 22, Z-Mart received a check for $980 in full payment of the Nov. 12 sale.
On Nov. 22, Z-Mart received a check for $980 in full payment of the Nov. 12 sale.
Nov.22 Cash 980 Sales Discount 20
Accounts Receivable 1,000 Received payment less discount
Contra Revenue Account
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Sales Returns and AllowancesSales Returns and Allowances
On Nov. 3, Z-Mart sold merchandise costing $4,000 for $7,500 on account The credit
terms were 2/10, n/30.
On Nov. 3, Z-Mart sold merchandise costing $4,000 for $7,500 on account The credit
terms were 2/10, n/30.
Nov.3 Accounts Receivable 7,500 Sales 7,500
Sales of merchandise on credit
Cost of Goods Sold 4,000 Merchandise Inventory 4,000
To record cost of sales
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Sales Returns and AllowancesSales Returns and Allowances
On Nov. 6, customer returns merchandises with a sales price of $800 and a cost of $600. The
return is related to the Nov. 3 sale.
On Nov. 6, customer returns merchandises with a sales price of $800 and a cost of $600. The
return is related to the Nov. 3 sale.
Nov. 6 Sales Returns and Allowances 800 Accounts Receivable 800
Customer returned merchandise
Merchandise Inventory 600 Cost of Goods Sold 600
Returned goods placed in inventory
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Sales Returns and AllowancesSales Returns and AllowancesAssume that $800 of merchandise Z-Mart sold on Nov.
3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction.
Assume that $800 of merchandise Z-Mart sold on Nov. 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction.
Nov. 6 Sales Returns and Allowances 100 Accounts Receivable 100
To record sales allowance on Nov. 3 sale.
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4. Completing accounting cycle4. Completing accounting cycle
Prepare adjustments and close accounts for a merchandising company.
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ShrinkageShrinkage
Compare a physical count of inventory with recorded amounts.
Z-Mart’s Merchandise Inventory account at the end of year 2005 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. The adjusting entry is:
12/31/2005 Dr. Cost of goods sold 250
Cr. Merchandise inventory 250
To adjust for $250 shrinkage.
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Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for
Z-Mart.
Completing the accounting cycleCompleting the accounting cycle
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Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.
Dec. 31 Sales . . . . . . . . . . . . . . . . . . . . 321,000 Income summary . . . . . . 321,000
To close credit balance in temporary accounts
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Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.
Dec. 31 Income Summary 308,100
Sales Discounts 4,300
Sales Returns and Allowances 2,000
Cost of Goods Sold 230,400
Depreciation Expense-Store Eq 3,000
Depreciation Expense-Office Eq 700
Office Salaries Expense 25,300
Sales Salaries Expense 18,500
Insurance Expense 600
Rent Expense - Office Space 900
Rent Expense - Selling Space 8,100
Office Supplies Expense 1,800
Store Supplies Expense 1,200
Advertising Expense 11,300
To close debit balances in temporary accounts
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Step 3:Step 3: Close Income Summary to Owner’s CapitalStep 3:Step 3: Close Income Summary to Owner’s Capital
Dec. 31 Income Summary 12,900 K. Mart, Capital 12,900
To close Income Summary account
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Step 4:Step 4: Close Withdrawals Account to Owner’s Capital.Step 4:Step 4: Close Withdrawals Account to Owner’s Capital.
Dec. 31 K Mart, Capital 4,000 K Mart, Withdrawals 4,000
To close the withdrawals account
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5. Financial statement format5. Financial statement format
Define and prepare multiple-step and single-step income statements.
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Income Statement FormatsIncome Statement Formats
Multiple-StepMultiple-Step
Single-StepSingle-Step
Multiple-StepMultiple-Step
Single-StepSingle-Step
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Multiple-Step Income Statement
Multiple-Step Income Statement
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Operating expensesOperating expenses
Selling expenses include the expenses of promoting sales by displaying and advertising merchandise, making sales, and delivering goods to customers.
General and administrative expenses support a company’s overall operations and include expenses related to accounting, HR management, and financial management.
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Single-Step Income StatementSingle-Step Income Statement
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Multiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statementMultiple-Step vs. Single-Step Income statement
A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and report subtotals for various classes of items. Gross profit Income from operations Net income
A single-step income statement lists revenues and expenses with very few categories.
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Classified Balance SheetClassified Balance Sheet
Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200$
Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2005
Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200$
Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2005
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6. Decision Analysis - Current Ratio & Acid-Test Ratio6. Decision Analysis - Current Ratio & Acid-Test Ratio
Helps assess the company’s ability to pay its debts in the near futureLiquidity measure
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6. Decision Analysis - Acid-Test Ratio6. Decision Analysis - Acid-Test Ratio
A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to
face liquidity problems in the near future.
= Quick AssetsQuick Assets Current LiabilitiesCurrent Liabilities
Acid-TestAcid-TestRatioRatio
Acid-TestAcid-TestRatioRatio ==
Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current LiabilitiesCurrent Liabilities
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6. Decision Analysis - Gross Margin Ratio6. Decision Analysis - Gross Margin Ratio
Percentage of dollar sales available to cover expenses and provide a profit.
GrossMarginRatio
Net Sales - Cost of Goods Sold
Net Sales
=
Indicate the company’s pricing capability of its products
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6. Decision Analysis - Supermarket6. Decision Analysis - Supermarket
1. Industry Characteristics High volume, Low profit margin Chain of stores
2. Key success factors Inventory control Store location decision
3. Companies for analysis Walmart Target
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6. Walmat & Target - Current Ratio6. Walmat & Target - Current Ratio
CR 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
WMT 0.90 0.90 0.90 0.90 1.00 0.90 0.90 1.20 1.30 1.70 1.50
Target 1.50 1.69 1.55 1.59 1.37 1.16
Current Ratio
0.80
0.90
1.00
1.10
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1994 1996 1998 2000 2002 2004 2006
Year
Cu
rre
nt
Ra
tio
WMT Target
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6. Walmat & Target - Acid-test Ratio6. Walmat & Target - Acid-test Ratio
ATR 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
WMT 0.19 0.17 0.17 0.13 0.15 0.13
Target 0.76 0.89 0.78 0.84 0.61 0.36
Acid-test Ratio
0.10
0.20
0.30
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1994 1996 1998 2000 2002 2004 2006
Year
Ac
id-t
es
t R
ati
o
WMT Target
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6. Walmat & Target - Gross Profit Margin6. Walmat & Target - Gross Profit Margin
GPM 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
WMT 23.06% 22.94% 22.46% 22.35% 22.02% 22.16% 22.03% 21.48% 21.29% 20.81% 20.85%
Target 33.62% 32.87% 32.45% 21.79% 17.80% 15.22% 31.67% 31.23% 31.08%
Gross Profit M argin
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
1994 1996 1998 2000 2002 2004 2006
Year
Gro
ss
Pro
fit
Ma
rgin
WMT Target
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6. Walmat & Target - Profit Margin6. Walmat & Target - Profit Margin
Profit Margin
1.00%
1.50%
2.00%
2.50%
3.00%
3.50%
4.00%
4.50%
5.00%
1994 1996 1998 2000 2002 2004 2006
Year
Pro
fit
Ma
rgin
WMT Target
PM 2005 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995
WMT 3.59% 3.60% 3.53% 3.46% 3.23% 3.45% 3.41% 3.37% 3.13% 3.05% 3.07%
Target 4.58% 4.02% 3.85% 3.68% 3.33% 3.23% 3.39% 3.05% 2.73%
Industry 3.50% 3.37% 3.71%