chapter 9 accounting for merchandising operations
TRANSCRIPT
Chapter 9
Accounting for Merchandising Operations
In Chapters 1-6
You learned how to:
o Prepare Adjusting Entries
o Prepare Closing Entries
o Use the Adjusted Balances to prepare Financial Statements
o Complete the Accounting Cycle
Accrual Basis Accounting
•Revenue recorded only when earned not when cash is received
•Expense recorded only when incurred not when cash paid—in the period in which the company benefited from it
Accrual Basis adheres to...
•Generally•Accepted•Accounting•Principles
Adjusting Entries
Adjusting entries make the:
revenue recognition &
matching principles
HAPPEN!
Still confused?
Do we need another way to learn this concept?
Revenue Recognition – a rap
If you wanna be accrualHere’s what you gotta do,When the service is performedYou book the Revenue!
In Chapter 9
You will learn:
o How Merchandise is Acquired and Sold
o How Inventory Purchases and Sales are recorded in a firm’s accounting records –using Perpetual Inventory system
o How to prepare Financial Statements that are meaningful for a merchandising operation
o Appendix: Periodic inventory system
Merchandising Operations
Buy Merchandise to Sell to their Customers
Wholesalers sell their merchandise to Retailers
Retailers Sell their merchandise directly to the final consumer
2 Categories
Target is a Retailer
The Operating Cycle for a Merchandiser…
In Chapter 2, we discussed the Historical Cost Principle
Assets are recorded on the Balance Sheet at cost
Cost includes all costs necessary to get the asset ready for its intended purpose $5,000
The Historical Cost Principle also applies to
Inventory
o Inventory is a Current Asset
o It is recorded on the Balance Sheet at Historical Cost
o Cost includes all costs necessary to get the inventory ready for its intended purpose
o Let’s look at the cost components for Inventory…..
Let’s assume a Perpetual Inventory System
o A Perpetual Inventory system records all changes in the value of Inventory directly in the Inventory Account.
This example begins on page 229 in your text.
On June 1, 20X6, Quality Lawn Mowers purchases 100 lawn mowers for $150 each
on account from Black & Decker.
Here’s the invoice…..
This is the Invoice
Date
This is the Invoice Amount
This information is
needed to record the purchase of
inventory
The journal entry to record the purchase of inventory….
15,000$ 15,000$
Equity
Inventory Accounts Payable
Assets Liabilities
The Purchase of Inventory is restricted to the Balance Sheet
Assume the Initial Investment by shareholders was $100,000 cash.
Goods in Transit
These are goods on board a truck, train, ship, or plane at the end of the period.
36
Goods in Transit
Who includes these in inventory?Buyer?Seller?
The Company
with Legal Title
Shipping TermsFOB (free on board) shipping point-
ownership of goods passes to buyer when public carrier accepts the goods
FOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer
Ownership passes to
owner here
Ownership passes to
buyer here
PublicCarrierCo
PublicCarrierCo
Seller
Seller
Buyer
Buyer
FOB Shipping Point
FOB Destination Point
Illustration 6-4
Incoming Freight is added to Inventory
As it Exits,
It’s an Expense!
Freight Costs – Memory Jog
IN
EX
Back to the invoice…..
Goods were purchased
FOB Shipping
Point
Title transferred to Quality Lawn
Mowers at the time the units were
shipped.
343$
343$
Inventory
Cash
The journal entry to record the incoming freight charge
1-Jun Paid freight charge on the purchase of lawn mowers, $343 cash.
Incoming Freight is Charged
to Inventory
Balance Sheet
Assets: Liabilities
$99,657 Accounts Payable $15,000
$15,343 $0
$0 $0
$0 Total Liabilities $15,000
$0
Total Current Assets $115,000 Stockholders' Equity
$100,000
$0 $0
$0
$0 $100,000
Total Plant Assets $0
$115,000 Total Liabilities + Shareholders' Equity $115,000Total Assets
Cash
Inventory
Accounts Receivable
Common Stock
Retained Earnings
Total Stockholders' Equity
When Inventory is purchased FOB Shipping Point, the Freight Cost is added to Inventory
Assume the Initial Investment by shareholders was $100,000 cash.
300$
300$ Inventory
Accounts Payable
Purchase Returns and Allowances
3-Jun Returned 2 mowers ($150 each) to manufacturer
Balance Sheet
Assets: Liabilities
$99,657 Accounts Payable $14,700
$15,043 $0
$0 $0
$0 Total Liabilities $14,700
$0
Total Current Assets $114,700 Stockholders' Equity
$100,000
$0 $0
$0
$0 $100,000
Total Plant Assets $0
$114,700 Total Liabilities + Shareholders' Equity $114,700
Cash
Inventory
Accounts Receivable
Common Stock
Retained Earnings
Total Stockholders' Equity
Total Assets
Purchase Returns and Allowances reduce the cost of the Inventory and the amount owed to the vendor
Purchase Discounts
2/10 net 30
If paid within 10 days of invoice
Take a 2% discount
Are Discounts for Early Payment
Otherwise, total is due within 30 days
Payment Terms
Take a 1% discount if paid within 10 days, otherwise entire balance is due in
30 days.
o Are included on the Invoice
o To encourage prompt payment
Purchase Discounts
9-Jun Paid Black & Decker in full within the discount period.
Notice that the Payable Balance is
now $0
Balance Owed = $14,700
$14,700 * 1% = $147
$14,700 minus $147 = $14,553
Notice that the Cost of the Inventory equals the sum of the cash payments.
$14,896
Inventory T account
$14,896 ÷ 98 units = $152 per mower
Balance Sheet
Assets: Liabilities
$85,104 Accounts Payable $0
$14,896 $0
$0 $0
$0 Total Liabilities $0
$0
Total Current Assets $100,000 Stockholders' Equity
$100,000
$0 $0
$0
$0 $100,000
Total Plant Assets $0
$100,000 Total Liabilities + Shareholders' Equity $100,000Total Assets
Cash
Inventory
Accounts Receivable
Common Stock
Retained Earnings
Total Stockholders' Equity
All transactions related to the Acquisition of inventory have been restricted to the Balance Sheet
As Assets are consumed, they are recorded as expenses on the Income Statement….
Balance Sheet Income Statement
Supplies Supplies Expense
Prepaid Insurance Insurance Expense
Prepaid Rent Rent Expense
As Inventory is consumed, it is expensed as Cost of Goods Sold.
It will be recorded as Inventory Expense?
So as Inventory is consumed…It is subtracted
on the Multiple-Step Income
Statement
What’s a Multiple Step
Income Statement?!!
Yes, but the Expense is
called “Cost of Goods Sold”
Why is it called a Multiple-Step Income Statement?
Because rather than taking total revenues and subtracting total expenses in a single step:
We “Step our way down” to Net Income RevenuesSubtract Something and Calculate a subtotalSubtract something else, Calculate another subtotal, etc.
Each subtotal will provide important information.
Multiple-Step Income Statement
Net Sales
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Income from Operations
- Other Expenses
+ Other Revenues
= Net Income
← Amount Customer pays for the goods
← Amount the Company paid for the goods
← This is our markup!
← Selling, General and Administrative Expenses
← Profitability of our Core Business
← Profitability of Peripheral Activities
← Transferred to Statement of Retained Earnings
No Chance….I’m a
GONER!
Yikes! That’s a lot to
remember!
Time for another JOG!
Multiple Step Income Statement – Memory Jog NC GONER!
N Net Sales
- Cost of Goods Sold
= Gross Profit
- Operating Expenses
= Net Operating Income
- Other Expenses
+ Other Revenues
= Net Income
C
G
O
N
E
R
A Scanner System is a perpetual inventory system…
Every time an item is
scanned…
2) The inventory database is
updated
1) The Sale is Recorded
This allows for an instantaneous match
of revenues and expenses
Journal Entries for Sales in a Perpetual Inventory System
Simultaneously, the cost of the units are removed from Inventory….
$14,896 ÷ 98 units = $152 per mower
Reporting Sales and Cost of Goods Sold
Each mower sold for $400.
Each unit cost $152.
That’s a $248 markup per unit.
But our customer isn’t completely happy….
Sales Returns and Allowances is a contra-revenue account.
Its purpose is to reduce sales, and provide more detailed information on the Income Statement.
Reporting Sales Returns and Allowances
Sales Returns and Allowances is subtracted from Sales
In the Calculation of Net Sales It allows the reader to know how
content the customers are with
the product.
They reduced the
price by $100 to
make me happy!
We offered our customer payment terms of 2/10 net 30 to encourage prompt payment
Notice that the Receivable Balance
is now $0
$3,900 * 2% = $78
Receivable Balance = $3,900
$3,900 - $78 = $3,822
Reporting Sales Discounts
Sales Discounts is subtracted from Sales
In the Calculation of Net Sales
It allows the reader to know how many customers took advantage of the early payment incentives
Paying early saved me
$78. I paid $3,822 for
the mowers
Merchandisers generate revenue by delivering goods to their customers.
The detail provided on a multiple-step income statement
Allows the reader to assess how successful they are in achieving that goal.
Appendix – PERIODIC INV.
Perpetual Inventory System
Continuous “perpetual” accounting records are kept to track the Sales transaction AND the Cost of the Goods Sold.
Better tracking of item availability, on hand, on order
2 journal entries for a sale
Periodic Inventory System
No trackingInventory just counted
“periodically” to see what is on hand.
1 journal entry for sale
Sales Revenues -Under a Periodic System
ONLY 1 entry is made for each saleone to record sale
Key difference between periodic and perpetual inventory…
is the point at which the costs of goods sold is
computed.
No attempt is made on date of sale to record the cost of merchandise sold...
Periodic Inventory
Companies that use periodic inventory take a physical count to...
determine ending inventorycompute cost of goods sold
Companies that use perpetual inventory must take a physical inventory to check accuracy of “book inventory” to actual inventory.
Example: Perpetual vs. Periodic
End – Chapter 9
Shipping Terms – FOB Shipping Point
Title transfers to BUYER at the time the
goods are shipped
Buyer Owns the goods in transit
Freight Costs are paid by the BUYER
This increases the cost of the goods purchased.
Shipping Terms – FOB Shipping Point
Shipping Terms – FOB Destination
Title Changes at the time the goods reach
their destination
Seller owns the goods in transit
Freight costs are paid by the SELLER
The freight cost is recorded as an operating expense by the seller
Shipping Terms – FOB Destination