c5 - 1 learning objectives power notes 1. nature of merchandising business 2a. accounting for...

C5 - 1

Learning Objectives

Power Notes

1. Nature of Merchandising Business2a. Accounting for Purchases2b. Accounting for Sales2c. Transportation Costs2d. Merchandise Transactions3. Merchandising Chart of Accounts4. Merchandising Income Statement5. Merchandising Accounting Cycle6. Financial Analysis and Interpretation

Chapter F5

Accounting for Merchandising Businesses Accounting for Merchandising Businesses

C5

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• Nature of Merchandising Businesses• Inventory Costs and Relationships• Perpetual Inventory Systems• Merchandising Transactions• Merchandising Chart of Accounts• Merchandising Financial Statements• Ratio of Net Sales to Assets

Slide # Power Note Topics

368

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Power NotesChapter F5


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Merchandising and InventoryMerchandising and Inventory

Merchandising involves selling inventory

Inventory is usually an important asset

Inventory must be accounted for periodically or perpetually

Traditional periodic method is often being replaced by perpetual inventory accounting

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Income Statement ComparisonIncome Statement Comparison

Fees earned $150,000

Operating expenses 120,000

Net income $ 30,000

Service Business

Sales revenue $600,000

Cost of mdse. sold 450,000

Gross profit $150,000


Net income $ 30,000

Merchandising Business

20% of revenues

5% of revenues

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Income Statement ComparisonIncome Statement Comparison

Fees earned $150,000


Net income $ 30,000

Service Business

Sales revenue $600,000

Cost of mdse. sold 450,000



Net income $ 30,000

Merchandising Business

20% of revenues

5% of revenues

75% of revenues

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LIABILITIES

OWNER’SEQUITY

REVENUES

ASSETS

COSTS &EXPENSES

Inventory Costs and RelationshipsInventory Costs and Relationships

MerchandiseMerchandiseInventoryInventory

Cost ofCost ofMdse. SoldMdse. Sold

If merchandise inventory is . . . . . . .

Cost of merchandise sold is . . . . . .

Gross profit and net income are . . .

Ending owner’s equity is . . . . . . . . .





overstated

understated

overstated

overstated

Net Income

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LIABILITIES

OWNER’SEQUITY

REVENUES

ASSETS

COSTS &EXPENSES

Inventory Costs and RelationshipsInventory Costs and Relationships

MerchandiseMerchandiseInventoryInventory

Cost ofCost ofMdse. SoldMdse. Sold









understated

overstated

understated

understated

Net Income

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Continuous determination of inventory value

Continuous determination of gross profit

Affordable with computers, scanners, and bar codes on most products

Perpetual inventory accounting provides management controls

Managers know which items are selling fastest and the profit margin on those items

Advantages of Using Perpetual InventoryAdvantages of Using Perpetual Inventory

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Cash 4,000Accts. Receivable 4,000

Accts. Receivable 12,500Sales 12,000Cash 500

Cost of Mdse. Sold 7,200Mdse. Inventory 7,200

Accounting for Merchandise TransactionsAccounting for Merchandise Transactions

Description Debit Credit

Cash 12,260Sales Discounts 240

Accts. Receivable 12,500

Accts. Payable 4,000Cash 4,000

Mdse. Inventory 12,500

Accts. Payable 12,500

Accts. Payable 12,500Mdse. Inventory 240Cash 12,260

Scully Company (Seller)Scully Company (Seller) Burton Co. (Buyer)Burton Co. (Buyer)


July 28. Scully Company received payment from Burton Co. less discount (2% x $12,000).

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Perpetual Inventory SystemPerpetual Inventory System

General Journal


General Ledger

Mdse. Inventory 5,000Accts. Payable 5,000

Mdse. Inventory

5,000AA

Cost of Mdse. Sold

AA

In a perpetual system, Mdse. Inventory is an active asset account.All changes are recorded as they occur.

Purchase on account

Return of merchandise

AABB

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NetSolutionsIncome Statement (Multiple-Step)

For Year Ended December 31, 2004

Continued

Revenue from sales:Sales $ 720,185Less:Sales returns and allow. $ 6,140

Sales discounts 5,790 11,930Net sales $708,255

Cost of merchandise sold 525,305


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NetSolutionsMerchandising Chart of Accounts

Income Statement Accounts

600 Other Income610 Rent Revenue611 Interest Revenue

700 Other Expense710 Interest Expense

400 Revenue410410 SalesSales411411 Sales Returns and Sales Returns and

AllowancesAllowances412412 Sales DiscountsSales Discounts

500 Costs and Expenses510510 Cost of Merchandise SoldCost of Merchandise Sold520 Sales Salaries Expense521 Advertising Expense522 Depreciation Expense—

Store Equipment523 Transportation Out523 Transportation Out529 Misc. Selling Expense530 Office Salaries Expense531 Rent Expense532 Depreciation Expense—

Office Equipment533 Insurance Expense534 Office Supplies Expense539 Misc. Admin. Expense

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General Journal


General Ledger


Accts. Payable 1,000 Mdse. Inventory 1,000

Mdse. Inventory

5,000AA

Cost of Mdse. Sold

1,000AA BB

BB4,000BalBal


Purchase on account


Sale of merchandise

AABB

CC

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NetSolutionsIncome Statement (Single-Step)

For Year Ended December 31, 2004

Revenues:Net sales $708,255Interest revenue 3,800Rent revenue 600

Total revenues $712,655Expenses:

Cost of merchandise sold $525,305Selling expenses 74,620Administrative expenses 34,890Interest expense 2,440

Total expenses 637,255

Net income $ 75,400

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NetSolutionsBalance Sheet

December 31, 2004

Continued

AssetsCurrent assets:

Cash $ 52,950Notes receivable 35,000Accounts receivable 55,880Interest receivable 200Merchandise inventory 62,150Office supplies 480Prepaid insurance 2,650

Total current assets $209,310

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December 31, 2004

AssetsProperty, plant, and equipment:

Land $ 20,000Store equipment $ 27,100 Less accum. depreciation 5,700 21,400

Office equipment $ 15,570 Less accum. depreciation 4,720 10,850Total property, plant, and

equipment 52,250

Total assets $261,560

Continued

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December 31, 2004

LiabilitiesCurrent liabilities:

Accounts payable $ 22,420Note payable (current portion) 5,000Salaries payable 1,140Unearned rent 1,800

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

Note payable (due 2001) 20,000

Total liabilities $ 50,360 Owner’s Equity

Capital stock $ 25,000Retained earnings 186,200 211,200

Total liabilities and owner’s equity $261,560

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General Journal


General Ledger


Accts. Payable 1,000 Mdse. Inventory 1,000

Accts. Receivable 3,250Sales 3,250


Mdse. Inventory

5,000AA

Cost of Mdse. Sold

2,500

Purchase on account


Sale of merchandise

1,000AA BB

BB

CC

CC2,500

1,500

CC

BalBal

AABB

CC


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General Journal


General Ledger

Mdse. Inventory

5,000AA

Cost of Mdse. Sold

2,500

Purchase on account


Sale of merchandise

1,000AA BB

BB

CC

CC2,500

1,500

CC

BalBal

AABB

CC


Mdse. InventoryMdse. Inventory 5,0005,000Accts. Payable 5,000

Accts. Payable 1,000 Mdse. Inventory Mdse. Inventory 1,000 1,000


Cost of Mdse. Sold 2,500Mdse. InventoryMdse. Inventory 2,5002,500

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Credit Terms, Cash DiscountsCredit Terms, Cash Discounts

Credit Terms: 2/10, n/30Credit Terms: 2/10, n/30

Is invoice paid within 10

days of invoicedate?

Full amount is due within 30 days of

invoice date.NoNo

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2% of invoice amount is

allowed as a cash discount.





YesYes


invoice date.NoNo

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2% of invoice amount is

allowed as a cash discount.





YesYes


invoice date.NoNo

Example: Merchandise was purchased for $1,500 with credit terms of 2/10, n/30. Payment within 10 days is calculated as: Invoice $1,500 Less 2% discount 30 Net cost paid $1,470

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Selling and Buying Merchandise InventorySelling and Buying Merchandise Inventory



Cost of Mdse. Sold 900Mdse. Inventory 900


SellerSeller BuyerBuyerDescription Debit Credit

Jan 12. Merchandise was sold with credit terms of 2/10, n/30.

Jan 22. Payment was made within the discount period.

Recorded at net costRecorded at net cost$1,500 - $30 (discount)$1,500 - $30 (discount)

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Recorded at net costRecorded at net cost$1,500 - $30 (discount)$1,500 - $30 (discount)

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Accts. Payable 1,500Mdse. Inventory 30Cash 1,470




Recorded at full costRecorded at full cost

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

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Transportation Out 250Cash 250


No entry.



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



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Transportation Out 250Cash 250



Sales Ret. & Allow. 1,000Accts Receivable 1,000

Mdse. Inventory 700Cost of Mdse. Sold 700


No entry.

Accts. Payable 1,000Mdse. Inventory 1,000



July 13. Scully Company issued Burton Co. a credit memo for merchandise returned, $1,000. The merchandise cost was $700.

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July 15. Scully Company received payment from Burton Co. for purchase of July 1.

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Accts. Receivable 12,500Sales 12,000Cash 500




July 18. Scully Company sold merchandise on account to Burton Co., $12,000, terms FOB shipping point, 2/10, n/eom. Scully Company prepaid transportation costs of $500. Cost of merchandise sold was $7,200.


Mdse. Inventory 12,500

Accts. Payable 12,500

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NetSolutionsMerchandising Chart of Accounts

Balance Sheet Accounts

200 Liabilities210 Accounts Payable211 Salaries Payable212 Unearned Rent215 Notes Payable

300 Stockholders’ Equity310 Capital Stock311 Retained Earnings312 Dividends313 Income Summary

100 Assets110 Cash111 Notes Receivable112 Accounts Receivable113 Interest Receivable115115 Merchandise InventoryMerchandise Inventory116 Office Supplies117 Prepaid Insurance120 Land123 Store Equipment124 Accumulated Depreciation—

Store Equipment125 Office Equipment126 Accumulated Depreciation—

Office Equipment

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Operating expenses:Selling expenses:

Sales salaries expense $60,030Advertising expense 10,860Depr. expense–store equip. 3,100Miscellaneous selling expense 630 Total selling expenses $ 74,620

Administrative expenses:Office salaries expense $21,020Rent expense 8,100Depr. expense–office equip. 2,490Insurance expense 1,910Office supplies expense 610Misc. admin. expenses 760 Total admin. expenses 34,890

Total operating expenses 109,510

Income from operations $ 73,440

Continued

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Other income:Interest revenue $ 3,800Rent revenue 600

Total other income $ 4,400Other expense:

Interest expense 2,440 1,960

Net income $75,400

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Profitability AnalysisProfitability Analysis

Profitability is the ability of an entity to earn profits.

This ability to earn profits depends on the effectiveness and efficiency of operations as well as resources available.

Profitability analysis focuses primarily on the relationship between operating results reported in the income statement and resources reported in the balance sheet.

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Profitability Measures — Effective Use of AssetsProfitability Measures — Effective Use of Assets

Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets

2003 1992Net sales $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500

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Ratio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to AssetsRatio of Net Sales to Assets

Use: To assess the effectiveness in the use of assets.

Use: To assess the effectiveness in the use of assets.

Net sales $1,498,000 $1,200,000Total assets:

Beginning of year $1,053,000 $1,010,000End of year 1,044,500 1,053,000Total $2,097,500 $2,063,000

Average $1,048,750 $1,031,500

Ratio of net sales to assetsRatio of net sales to assets 1.4 1.4 1.2 1.2

Profitability Measures — Effective Use of AssetsProfitability Measures — Effective Use of Assets

2003 2002

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This is the last slide in Chapter F5. This is the last slide in Chapter F5.

Power NotesChapter F5


c5 - 1 learning objectives power notes 1. nature of merchandising business 2a. accounting for...

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