ch 8 - merchandising operations

7/29/2019 Ch 8 - Merchandising Operations

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Accounting for MerchandisingOperations

CHAPTER 8

Ma. Rona Corda-Prado, CPAUniversity of St. La Salle


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1. Identify the differences between service andmerchandising companies.

2. Explain the recording of purchases under a perpetual andperiodic inventory system.

3. Explain the recording of sales revenues under a perpetualand periodic inventory system.

4. Explain the steps in the accounting cycle for amerchandising company.

5. Distinguish between a multiple-step and a single-stepincome statement.

6. Explain the computation and importance of gross profit.

7. Determine cost of goods sold under a periodic system.

Prepared by: RCPrado Chapter 8- 2


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Accounting for Merchandising Operations

Freight costs

Purchasereturns andallowances

Purchase

discountsSummary ofpurchasingtransactions

Merchandising

Operations

Recording

Purchases of

Merchandise

Recording

Sales of

Merchandise

Completing the

Accounting

Cycle

Forms of

Financial

Statements

Operatingcycles

Inventorysystemsperpetual and

periodic

Sales returnsandallowances

Salesdiscounts

Adjustingentries

Closing entries

Summary ofmerchandising

entries

Multiple-stepincomestatement

Single-stepincome

statementClassifiedbalance sheet

Determiningcost of goodssold under aperiodic system



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SERVICE ORGANIZATIONS

Service organizations sell time (intangible

product) to earn revenue.

Examples: Accounting firms, law firms and plumbing services

Revenues ExpensesMinus Net

income

Equals



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Manufacturer Wholesaler Retailer Customer

MERCHANDISING COMPANIES



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MERCHANDISING OPERATIONS

Merchandising Companies

Buy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to assales revenue orsales.



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MERCHANDISING OPERATIONS

Cost of goods sold is the total costof merchandise sold during the

period.

Not used in aService

business.

NetIncome(Loss)

Less

Less

Equals

SalesRevenue

Cost ofGoods Sold

GrossProfit

OperatingExpenses

Equals



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REPORTING INCOME OF A

MERCHANDISER

Cost of

Goods SoldGross

ProfitExpenses

Net

Income

Net

Sales

Minus Equals Minus Equals

Merchandising Company

Income Statement

For Year Ended December 31, 2007

Net sales 150,000$Cost of goods sold 80,000

Gross profit 70,000$

Operating expenses 46,500

Net income 23,500$



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The operatingcycle of a

merchandisingcompanyordinarily islonger than thatof a servicecompany.

OPERATING CYCLES



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TERMS OF SALE

Cash sale, spot cash or cash on delivery (COD) -payment is made upon receipt of the goods

On account or on credit - payment is made afterthe receipt of the goods



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OPERATING CYCLE FOR A

MERCHANDISER

Begins with the purchase of merchandise and ends with

the collection of cash from the sale of merchandise.

Purchases

Merchandise

inventory

Credit sales

Account

receivable

Cash

collectionPurchases

Merchandise

inventory

Cash

sales

Cash Sale Credit Sale



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PURCHASE PROCESS

Purchase

RequisitionForm

USER DEPT PURCHASINGDEPT

Purchase

Order

SELLER

SalesInvoice

RECEIVINGDEPT

ReceivingReport

ACCOUNTS

PAYABLE andINVENTORY



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INVENTORY SYSTEMS

PerpetualInventorySystem

PeriodicInventorySystem

Primarily used by businesses thatsell relatively inexpensive goods andthat are not yet using POS systems

No entries are made to the inventoryaccount as the merchandise is

brought and sold

Purchase and related accounts areused to accumulate the net cost ofpurchase

Inventory is established at the end of

the period, after the inventory count

Used by merchandisers using point ofsale (POS) equipment

Inventory account is continuouslyupdated both at the time of purchaseand the time of sale

In the absence of POS, this system ismore suited to low volume, highpriced goods such as motor vehicles,jewelry and furniture

Inventory records are reconciled with

the physical countPrepared by: RCPrado Chapter 8- 13


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Features:

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.3. Calculation of Cost of Goods Sold:

Beginning inventory $ 100,000Add: Purchases, net 800,000

Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000

INVENTORY SYSTEMS

PERIODIC



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INVENTORY SYSTEMS -

PERIODIC

+

+

Beginninginventory

Net cost ofpurchases

Merchandiseavailable for sale

Ending inventoryCost of goods

sold

=



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Features:

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and

Purchase Discounts are included in Merchandise Inventory.3. Cost of Goods Sold is increased and Merchandise Inventory

is decreased for each sale.

4. Physical count done to verify Merchandise Inventory

balance.

The perpetual inventory system provides a continuous record ofMerchandise Inventory and Cost of Goods Sold.

INVENTORY SYSTEMS -

PERPETUAL



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Made using cash orcredit (on account).

Normally recorded

whengoods are received.

Purchase invoice

shouldsupport each creditpurchase.

RECORDING PURCHASES OF

MERCHANDISE



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TRADE DISCOUNTS

Used by manufacturers andwholesalers to offer better prices for

greater quantities purchased.

ExampleMatrix, Inc. offers a 30% trade

discount on orders of 1,000units or more of their popular

product Racer. EachRacer has a list price of $5.25.

Quantity sold 1,000

Price per unit 5.25$

Total 5,250

Less 30% discount (1,575)Invoice price 3,675$



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CASH DISCOUNTS

A deduction from the invoice price granted to induce

early or prompt payment of the amount due.

Terms

Time

Due

Discount Period

Due: Invoiceprice minus

discount

CreditPeriod

Due: Full Invoice Price

Invoice Date

Note: When counting the days for thediscount period, do not include the day

when the invoice was issued .Prepared by: RCPrado Chapter 8- 19


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2/10,n/30

CASH DISCOUNTS

DiscountPercent

Number ofDays

Discount IsAvailable

Otherwise,Net (or All)Is Due in 30

Days

CreditPeriod



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Account is due30 days from

invoice date, nocash discount

available.

n/30

Account is duewithin 10 daysfrom the end of

the month of

purchase, nocash discount

available.

n/10, EOM

COMMON CREDIT TERMS

Account is duewithin 30 days

from invoice date;2% cash discount

if paid within 10days; 1 %discount if 10

days < paymentdate < 15 days

2/10, 1/15, n/30



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CASH DISCOUNTS

On May 7, Jason, Inc. purchasedP27,000 of merchandise inventory onaccount, credit terms are 2/10, n/30.

Jason paid on May 12.

Invoice Amount P27,000

Less: Discount (540)Net Payment P26,460

Boardwork : Problem # 1 pp 402



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Terms

FOB shipping point- seller places goods Free On

Board the carrier, and buyer pays freight costs.FOB destination- seller places the goods Free OnBoard to the buyers place of business, and sellerpays freight costs.

RECORDING PURCHASES OF MERCHANDISE

SHIPPING TERMS

Freight costs incurred by the seller on outgoing merchandise are anoperating expense to the seller (Freight-out or Delivery Expense).

Freight costs incurred by the buyer on incoming merchandise are capitalizedas part of inventory purchases (Freight-in or Transportation-in).



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TRANSPORTATION COSTS

FOB shipping point(buyer pays)

FOB destination(seller pays)Merchandise

Seller Buyer

Terms

Ownership transfers

to buyer when goodsare passed to

Transportationcosts paid by

FOB shipping point Carrier Buyer

FOB destination Buyer Seller

FOB - Free

on Board



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FOB Destination Point

PublicCarrier

Seller Buyer

GOODS IN TRANSIT

PublicCarrier

Seller Buyer

FOB Shipping Point

Ownership passesto the buyer here.



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FOB shipping point(buyer pays)

FOB destination(seller pays)Merchandise

Seller Buyer

Freight prepaid - Seller pays the transportation costs beforeshipping the goods sold

Freight collect - The freight company collects from the buyerupon delivery



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Freight Terms

Who Shoulders theTransportation

Costs?

Who Pays theShipper?

FOB Destination, Freight Prepaid Seller Seller

FOB Shipping Point, FreightCollect

Buyer Buyer

FOB Destination, Freight Collect Seller Buyer

FOB Shipping Point, FreightPrepaid

Buyer Seller

Boardwork : Problem # 4 pp 404Provide solutions to Problem #5 pp 205 for self-study.Prepared by: RCPrado Chapter 8- 27


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PERIODIC PERPETUAL

Purchase of Merchandise for Cash

Purchases xxxCash xxx

Merchandise Inventory xxxCash xxx

Purchase of Merchandise on account, the freight

charges to be shouldered by the buyerPurchases xxx

Freight-in xxx

Accounts Payable xxx

Merchandise Inventory xxx




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Information related to Steffens Co. is presented below.Prepare the journal entry to record the transactionunder the periodic and perpetual inventory system.

On April 5, purchased merchandise from Bryant Companyfor P25,000 terms 2/10, net/30, FOB shipping point.

Merchandise inventory 25,000April 5

Accounts payable 25,000


MERCHANDISE

Purchases 25,000April 5




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On April 6, paid freight costs of P900 on merchandisepurchased from Bryant.

Merchandise inventory 900April 6

Cash 900

Freight-in 900April 6

Cash 900


MERCHANDISE



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On April 7, purchased equipment on account for P26,000.

Equipment 26,000April 7



MERCHANDISE

Not all purchases increase Purchases or Merchandise Inventory.

Equipment 26,000April 7




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Purchaser may be dissatisfied because goods are

damaged or defective, of inferior quality, or do notmeet specifications.

Return goods for credit ifthe sale was made oncredit, or for a cash refund

if the purchase was forcash.

May choose to keep themerchandise if the sellerwill grant an allowance(deduction) from the

purchase price.

Purchase Return Purchase Allowance

PURCHASE RETURNS AND

ALLOWANCES



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PERIODIC PERPETUAL

Return of merchandise to seller due to defect or damage -

Cash refund for cash purchasesCash xxxPurchase Returns and

Allowances xxx

Cash xxx


Return of merchandise to seller due to defect or damage -Debit memo for credit purchases


Purchase Returns and

Allowances xxx





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On April 8, returned damaged merchandise to BryantCompany and was granted a P4,000 credit for returnedmerchandise.

Accounts payable 4,000April 8

Merchandise inventory 4,000


Accounts payable 4,000April 8

Purchase Returns & Allowances 4,000



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In a perpetual inventory system, a return ofdefective merchandise by a purchaser is recordedby crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowance

d. Merchandise Inventory

Review Question




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Credit terms may permit buyer to claim a cash

discount for prompt payment.Advantages:

Purchaser saves money.

Seller shortens the operating cycle.

Purchase Discounts




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PERIODIC PERPETUAL

Payment of account, less of cash discount

Accounts Payable xxxPurchases Discount xxx

Cash xxx

Accounts Payable xxxMerchandise Inventory xxx

Cash xxx

Payment of account, no discount taken


Cash xxx


Cash xxx



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On April 15, paid the amount due to Bryant Company infull. (Remember the return of P4,000 of merchandise.)

Accounts payable 21,000April 15Cash 20,580

Merchandise Inventory 420

(Discount = P21,000 x 2% = P420)


Accounts payable 21,000April 15 Cash 20,580

Purchase discounts 420



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Accounts payable 21,000April 16or later Cash 21,000

What entry would be made if the company failed to paywithin 10 days?


Accounts payable 21,000April 16or later Cash 21,000



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WHEN DISCOUNT IS NOT TAKEN

If we fail to take a 2/10, n/30

discount, is it really expensive?

365 days 20 days 2% = 36.5% annual rate

Days in aYear. Couldalso be

360.

Numberof additional

days beforepayment

Percentpaid tokeep

money



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Should discounts be taken when offered?

Discount of 2% on P21,000 P 420.00

P21,000 invested at 10% for 20 days 115.07Savings by taking the discount P 304.93

Example: 2% for 20 days = Annual rate of 36.5%

(365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an

interest rate of 2% on the use of P21,000 for 20 days.

WHEN DISCOUNT IS NOT TAKEN



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- PERIODIC

Purchases P25,000

Less: Purchase Returns & Allowances P 4,000

Purchase discounts 420 4,420

Net Purchases P20,580

Freight-in 900

Net Cost of Purchases P21,480



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Merchandise Inventory

Debit Credit

$25,000 8th - Return$4,000

Balance

5th - Purchase

$21,480

420 15th - Discount9006th Freight-in


- PERPETUAL



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SEATWORK/ASSIGNMENT

Problem #10 pp 408

Journalize instead of using T-accounts (use #in lieu of an explanation).

Record assuming

(1) periodic inventory system is used

(2) perpetual inventory system is used



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Made for cash or credit (on account).

Normally recorded whenearned, usually when

goods transfer fromseller to buyer.

Sales invoice shouldsupport each creditsale.

RECORDING SALES OF MERCHANDISE



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Main Source, Inc. Invoice614 Tech Avenue Date Number

Nashville, TN 37651 5/4/07 358-BI

S

ol

d

T

o

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 Prepaid

Item Description Quanity Price Amount

AC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000

We appreciate your business! Ship Chg. -

Tax -

Total 27,000$

Invoice SellerInvoice datePurchaserOrder numberCredit termsFreight terms

GoodsInvoice amount

SALES INVOICE



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1. On December 3,Wheeler Company sold P500,000 ofmerchandise to Hashmi Co., terms 2/10, n/30, FOB shippingpoint. The cost of the merchandise sold was P350,000.

2. On December 8, Hashmi Co. was granted an allowance ofP27,000 for merchandise purchased on December 3.

3. On December 13,Wheeler Company received the balancedue from Hashmi Co.

Instructions: Prepare the journal entries to record thesetransactions on the books of Wheeler Company under theperiodic and perpetual inventory system.




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PERIODIC PERPETUAL

Sales of Merchandise for Cash

Cash xxxSales xxx

Cash xxxSales xxx

Recording of cost of merchandise sold

No Entry Cost of Goods Sold xxx




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PERIODIC PERPETUAL

Sales of Merchandise on Account

Accounts Receivable xxxSales xxx

Accounts Receivable xxxSales xxx

Recording of cost of merchandise sold

No Entry Cost of Goods Sold xxx




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PERIODIC PERPETUAL

Payment of Freight Charges (FOB Destination)

Freight-Out or DeliveryExpense xxx

Cash xxx

Freight-Out or DeliveryExpense xxx

Cash xxx

Payment of Freight Charges (FOB Shipping Point)

Accounts Receivable xxx

Cash xxx


Cash xxx



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On December 3, Wheeler Company sold P500,000 ofmerchandise to Hashmi Co., terms 2/10, n/30, FOB shippingpoint. Cost of merchandise sold was P350,000.

Accounts receivable 500,000Dec. 3

Sales 500,000

Cost of goods sold 350,000



Accounts receivable 500,000Dec. 3Sales 500,000


S S S


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Flipside of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns and

allowances as a percentage of sales. could distort comparisons between total sales

in different accounting periods.

Sales Returns and Allowances

SALES RETURNS AND

ALLOWANCES



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PERIODIC PERPETUAL

Sales Returns - Cash Sales

Sales Returns andAllowances xxx

Cash xxx


Cash xxx

Recording the Cost of Returned Merchandise

No Entry Merchandise Inventory xxx

Cost of Goods Sold xxx



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PERIODIC PERPETUAL

Sales Returns - Credit Sales





Recording the Cost of Returned Merchandise

No Entry Merchandise Inventory xxx

Cost of Goods Sold xxx



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PERIODIC PERPETUAL

Sales Allowances - Cash Sales


Cash xxx


Cash xxx

Sales Allowances - Credit Sales



Sales Returns and

Allowances xxx




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On December 8, Hashmi Co. was granted an allowance ofP27,000 for merchandise purchased on December 3.


Sales returns and allowances 27,000Dec. 8Accounts receivable 27,000

Sales returns and allowances 27,000Dec. 8

Accounts receivable 27,000



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Variation:On Dec. 8, Hashmi Co. returned merchandise forcredit of P27,000. The original cost of the merchandise toWheeler was P19,800.

Sales returns and allowances 27,000Dec. 8



Cost of goods sold 19,800


Sales returns and allowances 27,000Dec. 8Accounts receivable 27,000



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The cost of goods sold is determined and recordedeach time a sale occurs in:

a. periodic inventory system only.

b. a perpetual inventory system only.

c. both a periodic and perpetual inventorysystem.

d. neither a periodic nor perpetual inventorysystem.

Review Question




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Offered to customers to promote prompt payment.

Flipside of purchase discount.

Contra-revenue account (debit).

Sales Discount




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PERIODIC PERPETUAL

Collection from Customer, less discount

Cash xxxSales Discounts xxx


Cash xxxSales Discounts xxx


Collection from Customer, no discount

Cash xxx


Cash xxx




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On December 13, Wheeler Company received the balancedue from Hashmi Co.

Cash 463,540Dec. 13


Sales discounts 9,460

Sales Discounts = [(P500,000

P27,000) X 2%]


Cash 463,540Dec. 13

Accounts receivable 473,000Sales discounts 9,460



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Prepare the sales revenue section of the incomestatement for Wheeler Company.

Sales revenue

Sales P 500,000

Less: Sales returns and allowances (27,000)Sales discounts (9,460)

Net sales P 463,540

Income Statement (Partial)For the Month Ended Dec. 31, 2010

Wheeler Company


Gross Sales



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SEATWORK/ASSIGNMENT

Problem #11 pp 409

Follow instructions as provided in the book

Problem # 17 pp 415

Journalize using both periodic and perpetualinventory systems.

Assume 25% mark-up on cost in recognizing cost of

goods sold under the perpetual system



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ACCOUNTING FOR VAT

Under Philippine tax laws, a 12% value added tax(VAT) is levied by the government to both the buyerand the seller for every purchase and sale of goods

and services, unless exempted by law. When merchandise is purchased, VAT will increase the

amount paid by the buyer but would not increase thecost of good purchased. VAT paid is debited to Input

Taxaccount. When goods are sold, VAT will increase the amount

collected by the seller but would not increase sales.VAT collected is credited to Output Taxaccount.



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ACCOUNTING FOR VAT

At the end of the accounting period, Input VAT isoffset against Output VAT.

If input tax > output tax: debit the difference to

Prepaid Taxwhich can be offset or used againstfuture Output Tax

If input tax < output tax: credit the difference toVATPayable. This amount would be remitted to the

government.



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COST OF GOODS SOLD

Seller Buyer

Largest single expense of the merchandising business

Cost of inventory that the business has sold tocustomers


DETERMINING COST OF GOODS SOLD


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Periodic System

Separate accounts used to record purchases,

freight costs, returns, and discounts.Company does not maintain a running account ofchanges in inventory.

Ending inventory determined by physical count.


UNDER A PERIODIC SYSTEM



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COST OF GOODS SOLD

Cost of Goods Available for Sale(COGAS)

BeginningInventory

Purchases

EndingInventory

Cost ofGoods Sold




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Calculation of Cost of Goods Sold

$316,000


UNDER A PERIODIC SYSTEM



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CALCULATION OF GROSS PROFIT

Key Items:

Net sales

Gross profit

Gross profitrate

ch 8 - merchandising operations

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