merchandising operations and the accounting cycle

5 - 1©2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber

Merchandising Operations

and the Accounting Cycle

Chapter 5


Service Co. Income Statement Year ended June 30, 20xxService revenue $xxxExpenses:Salary expense xDepreciation expense xIncome tax expense xNet income $ xx

Merchandising Co. Income StatementYear ended June 30, 20xxSales revenue $xxxCost of goods sold xGross profit xxOperating expenses:Salary expense xDepreciation expense xNet income $ xx

Income StatementsIncome Statements


Use sales and gross profit

to evaluate a company.

Objective 1


Net salesNet sales

Sales Revenue less Sales Returns and Sales DiscountsSales Revenue less Sales Returns and Sales Discounts

=

Sales Revenue


Target CorporationIncome Statement (Adapted)

Year Ended December 31, 2000Net sales revenue (same as Net sales) $33,212Cost of goods sold (same as Cost of sales) 23,029Gross profit (same as Gross margin) 10,183Expenses: Selling, general, administrative 7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302Total operating expenses 9,039Net earnings (same as Net income) $ 1,144

Millions

Gross Profit or Gross Margin


Operating Cycle of a Merchandising Business

CashCash

InventoryInventory

CashCash

InventoryInventoryAccounts

ReceivableAccounts

Receivable

Purchase and Cash Sale Purchase and Sale on Account


PerpetualPerpetual

PeriodicPeriodic

Inventory Systems


Account for the purchase

and sale of inventory.

Objective 2


Purchase of Inventory

Merchantpreparespurchase

order

Merchantpreparespurchase

order

Supplierssend

merchandiseand a bill

Supplierssend

merchandiseand a bill

ComparesCompares


Purchase of Inventory Example

On May 1, the Sporting Store acquired on account $2,000 of various items for resale.

The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale.

What is the journal entry?


May 1

Inventory $2,000 Accounts Payable $2,000

Purchased inventory on account

Inventory Accounts Payable 2,000 2,000

May 1

Inventory $2,000 Accounts Payable $2,000

Purchased inventory on account

Inventory Accounts Payable 2,000 2,000

Purchase of Inventory Example


Recording Purchase Returnsand Allowances Example

Assume that on May 4 a $100 item was returned prior to payment of the invoice.


May 4 Accounts Payable 100

Inventory 100 Merchandise was returned

May 4 Accounts Payable 100

Inventory 100 Merchandise was returned



Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance.


May 4 Accounts Payable 10 Inventory 10Received a purchase allowance

May 4 Accounts Payable 10 Inventory 10Received a purchase allowance



Inventory 2,000 100 10

Bal. 1,890

Accounts Payable100 2,000 10

Bal. 1,890


Purchase Discounts

Credit terms are stated in expressions such as: 2/10, N/30, meaning that a discount of 2% is

allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days.


Purchase Discounts Example

Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30.

The store paid within the discount period. The 2% discount ($20) is deducted from the

amount due ($1,000) and $980 is remitted.


Purchase Discounts Example


Accounts Payable 1,000Cash 980Inventory 20

To record payment of invoice within the discount period

Accounts Payable 1,000Cash 980Inventory 20

To record payment of invoice within the discount period


Recording Transportation Costs

Transportation costs are the cost of moving inventory from seller to buyer.

FOB stands for Free on Board and governs the passing of title of the goods.

Selling/buying agreements usually specify FOB terms.


Recording Transportation Costs

FOB Shipping PointFOB Shipping Point

FOB DestinationFOB Destination


Freight Charges Example

Assume that on May 9 the Sporting Store paid $60 for freight.


May 9Inventory 60

Cash 60 Paid a freight bill

May 9Inventory 60

Cash 60 Paid a freight bill


Sporting Store Example

Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash.

What are the journal entries?



May 11Cash 2,600

Sales Revenue 2,600To record sale of merchandise

May 11Cash 2,600

Sales Revenue 2,600To record sale of merchandise

May 11Cost of Goods Sold 1,800

Inventory 1,800To record the cost of merchandise sold

May 11Cost of Goods Sold 1,800

Inventory 1,800To record the cost of merchandise sold



On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000.

Terms are 2/10, N/30.

Invoice Maria Gym Terms 2/10, N/30 Total $5,000


Sales Discounts and Sales Returns and Allowances

Example On May 17, Maria Gym returned $1,500

worth of goods that cost $900. In addition, a credit of $100 was allowed

for merchandise that was damaged. What are the journal entries?



ExampleMay 17Sales Returns and Allowance 1,500

Accounts Receivable 1,500Received returned merchandise

May 17Sales Returns and Allowance 1,500

Accounts Receivable 1,500Received returned merchandise

May 17Inventory 900

Cost of Goods Sold 900Returned goods to inventory

May 17Inventory 900

Cost of Goods Sold 900Returned goods to inventory



Example

There is no entry required for inventory since the goods were not returned.

May 17Sales Returns and Allowance 100

Accounts Receivable 100Credit granted for damaged goods

May 17Sales Returns and Allowance 100

Accounts Receivable 100Credit granted for damaged goods


Accounts Receivable May 15 = $5,000Accounts Receivable May 15 = $5,000

Less May 17 returns and allowances $1,600Less May 17 returns and allowances $1,600

Equals May 20 balance due of $3,400Equals May 20 balance due of $3,400


Example On May 20, the store received a check from

Maria Gym for the balance due. What is the balance due?



Example Maria took advantage of the sales terms –

2/10, N/30.

May 20Cash 3,332Sales Discounts 68

Accounts Receivable 3,400Cash collected within the discount period

May 20Cash 3,332Sales Discounts 68

Accounts Receivable 3,400Cash collected within the discount period


Adjust and close the accounts of a merchandising business.

Objective 3


Book InventoryBalance

$255,000

Book InventoryBalance

$255,000

PhysicalCount

$252,500

PhysicalCount

$252,500

$2,500 difference$2,500 difference

Adjustments to Inventory Example


December 31Cost of Goods Sold 2,500

Inventory 2,500To adjust inventory to physical count

December 31Cost of Goods Sold 2,500

Inventory 2,500To adjust inventory to physical count

Adjustments to Inventory Example



Revenues IncomeSummary

C.G.S.

Sales Discount22,824

Returns and A.32,605

CapitalAccount

1,490,400

2,760,000 7,348 2,767,348

Other Exp.

1,884,348

883,000

883,000 338,519

Closing Entries for a Merchandising Business


Prepare a merchandiser’s

financial statements.

Objective 4


Income Statement Formats

There are two basic formats for the income statement:

1 Multi-step2 Single-step


Multi-Step Format

Sporting StoreIncome Statement

Year Ended December 31, 2002Sales revenue $2,760,000Sales discounts – 22,824Returns and allowances – 32,605Net sales revenue $2,704,571Cost of goods sold –1,490,400

Gross margin $1,214,171


Multi-Step Format

Gross margin $1,214,171Operating expenses:Wage expense – 166,285Rent expense – 137,000Insurance expense – 16,302Depreciation expense – 9,781Supplies expense – 8,151

Operating income $ 876,652


Multi-Step Format

Operating income $876,652Other revenue and expenses:Interest revenue 7,348Interest expense – 1,000

Net income $883,000


Single-Step Format

Sporting StoreIncome Statement

Year Ended December 31, 2002

Revenues:Net sales (net of sales discounts) $2,704,571Interest revenue 7,348

Total revenues $2,711,919


Single-Step Format

Expenses:Cost of goods sold $1,490,400Wage expense 166,285Rent expense 137,000Interest expense 1,000Insurance expense 16,302Depreciation expense 9,781Supplies expense 8,151Total expenses $1,828,919

Net income $ 883,000


Use the gross margin percentage

and the inventory turnoverratio to evaluate a business.

Objective 5


Inventory turnover = Cost of goods sold÷ Average inventory

Inventory turnover = Cost of goods sold÷ Average inventory

Gross profit percentage = Gross profit÷ Net sales revenue

Gross profit percentage = Gross profit÷ Net sales revenue

Using the Financial Statements for Decision Making


Gross Profit on $1 for Three Merchandisers

Grossmargin$0.45

Grossmargin$0.42

Cost ofgoods sold

$0.55

Cost ofgoods sold

$0.58

Cost ofgoods sold

$0.79

Grossmargin$0.21

Wal-MartStores, Inc.

$1.00 —

$0.75 —

$0.50 —

$0.25 —

$0.00 AustinSound

TargetCorporation


Rate of Inventory Turnover for Three Merchandisers

1

Wal-Mart Stores, Inc.

2 3 4 5 6 7

1

Target Corporation

Austin Sound

7.0 timesper year

Jan Mar Jun Sep Dec

2 3 4 5

5.4 timesper year

1 2

2.3 timesper year


Compute thecost of goods

sold.

Objective 6


Purchases of inventory – Purchases discounts –Purchases returns and allowances = Net purchases

Purchases of inventory – Purchases discounts –Purchases returns and allowances = Net purchases

Beginning inventory + Net purchases + Freight-in= Cost of goods available for sale

Beginning inventory + Net purchases + Freight-in= Cost of goods available for sale

Cost of goods available for sale – Ending inventory= Cost of goods sold

Cost of goods available for sale – Ending inventory= Cost of goods sold

Computing the Cost of Goods Sold in a Periodic System


BeginningInventory$20,000

BeginningInventory$20,000

Purchases andFreight-In$101,000

Purchases andFreight-In$101,000

EndingInventory$15,000

EndingInventory$15,000

Cost of GoodsSold

$106,000

Cost of GoodsSold

$106,000

Cost of GoodsAvailablefor Sale

$121,000

Cost of GoodsAvailablefor Sale

$121,000




End of Chapter 5

merchandising operations and the accounting cycle

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