session 6 merchandising1
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TRANSCRIPT
Merchandising 1
Merchandising Operations
Comparison of Income Statements Operating Cycle of a Merchandising
Business Purchase Transaction
Terms of Transactions Inventory Systems Sales Transactions
Net Sales/Gross Sales Cost of Goods Sold
Net Purchases Operating Cost
Comparison of Income Statement Net sales arise from the sale of goods Cost of goods sold represents the cost
of inventory, the entity has sold to customers
Gross margin from sales (gross profit) Difference between net sales and cost of
goods sold
Operating expenses – other that cost of goods sold, which are incurred to generate sales
Operating Cycle of a Merchandising Business Purchases inventory, sells the
inventory and uses the cash to purchase more inventory
The faster the sale of inventory and the collection of cash, the higher the profits
Source Documents
Sales invoice Bill of landing Statement of account Official receipt Deposit slip Check Purchase requisition Purchase order Receiving report Credit memorandum
Steps in purchase transaction1. Fills a purchase requisition form and sends to
purchasing department2. Purchasing department prepares a purchase
order after checking descriptions3. Seller forwards an invoice to the purchaser
upon shipment of the merchandise4. The purchaser’s receiving department sees
to it that the terms in the purchase order are complied with and prepares a receiving report
5. Before approval of invoice payment, the AP department compares copies to the previous documents
Terms of Transactions
Merchandise may be purchased and sold either on credit terms or for cash on delivery
When goods are sold on account, a period of time called credit period is allowed for payment
If the credit period is 30 days, then payment is expected within 30 days from the invoice date
Described as the net credit period on net tems 30 days is noted as “n/30” 10 days after the end of the month “n/10 eom”
Cash Discounts
For prompt payment (called cash discount) This practice improves the seller’s cash
position by reducing the amount of money is accounts receivable
Designed by such notation as “2/10” The buyer may avail of two percent discount if
the invoice is paid within ten days from the invoice date
10 days (discount period) covered by the discount
Cash discounts are called purchase discount from the buyer’s view point and sales discount from the seller’s point of view.
example
Cash Discount of 2% on P150,000 3,000
Interest for 20 days at an annual rate of 18% on the amount due within the discount period:
P147,000 * 18% * 20/360
Savings effected by barrowing 1,470
Amount due = 150,000 invoice price – 3,000 cash discounts
1,530
Trade Discount
Encourage the buyers to purchase products because of markdown from the list price
Enables the suppliers to vary prices periodically without the inconvenience of revising price lists and catalogs
There is no trade discount account, instead, all accounting entries are based on the invoice price which is obtained by subtracting the trade discount from the list price
Transportation Cost
Freight bill designates which party shoulders the costs, and whether the shipment is freight prepaid or freight collect
FOB (free on board) Shipping point: the buyer shoulders the
shipping costs; ownership over the goods passes from seller to the buyer.
Buyer already owns the goods while still in transit and therefore, shoulders the transportation cost
FOB Destination The seller bears the shipping cost Title passes only when the goods are
received by the buyer at the point of destination; while in transit
The seller is still the owner of the goods so the seller shoulders the transportation costs
Freight prepaid The seller pays the transportation costs
before shipping the goods sold Freight collect
The freight company collects from the buyer
Payments by either party will not dictate who should ultimately shoulder the costs
Freight termsWho
shoulders the Tc?
Who Pays the Shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller
Shipping cost borne by the buyer using the periodic inventory system are debited to transportation in account
Shipping cost borne by the seller are debited to transportation out account, also called delivery expense, an operating expense in the income statement
Inventory Systems
Key factor in determining cost of goods sold
Merchandising inventory represents goods available for sale, there must be method of determining both the quantity and the cost of these goods.
Periodic Inventory or Perpetual Inventory
Periodic Inventory System Primarily used by businesses that sell
relatively inexpensive goods and that are not yet using computerized scanning system to analyze good sold
No entries are made to the inventory account as the merchandise is bought and sold
When goods are purchased, a separate set of accounts is used to accumulate information on the net cost of the purchases
Only at the end of the period, when the inventory is counted, will entries be made to the inventory account to establish its proper balance
Perpetual Inventory System Inventory account is continuously updated Perpetually updating the inventory
account requires that at the time of purchase, merchandise acquisitions be recorded as debit to the inventory account.
At the time of sale, the cost of goods sold is determined and recorded by a debit to the cost of goods sold account and a credit to the inventory account
Both the inventory and cost of goods sold accounts receive entries throughout the accounting period.
POS scanners built into checkout counters to collect transactional data for the cash register and to update their perpetual inventory system
Is more advisable for forms that sell low-volume, high-priced goods
The ending inventory should reconcile with the actual physical count at the end of the period assuming that no theft, spoilage, or error has occurred
account is adjusted for any inaccuracies discovered
The count provides as independent check on the amount of inventory that should be reported at the end of the period
Net Sales
Net sales is the first part of the merchandising income statement as presented below
Net Sales
Gross Sales 2,463,500
Less: Sales Returns and Allowances
27,500
Sales Discount 42,750 70,250
Net Sales 2,393,250
Gross Sales
Under accrual accounting, revenues form the sale of merchandise are considered to be earned in the accounting period in which the title of goods passes-usually at the point of delivery – from the seller to the buyer
Gross sales consist of total sales for cash and on credit during an accounting period
Cash for sale is uncollected, the revenue is recognized as earned at the time of sale
As an income account, the sales account is credited whenever sales on account or cash are made.
Only sales of merchandise held for resale are recorded in the sales account
If the firm sold one of its delivery trucks, the credit would be made to the delivery equipment account, not to sales account
9-16 Cash 25,000Sales 25,000
To record sale of merchandise for cash
9-16 Accounts Receivable 25,000Sales 25,000
To record sale of merchandise on credit
Sales Discount
Assume that Corleto delights sold merchandise on 9-20 for P30,000; terms 2/10, n/60. at the time of sale, the entry
9-20 Account Receivable 3,000Sales 3,000
To record sales on credit; terms 2/10, n/60
The customer may take advantage of the sales discount any time on or before 9-30, which is 10 days after the date of the invoice
9-30 Cash 2,940
Sales Discounts 60Accounts Receivable 3,000
To record collection on the 9-20 sale, discounts taken.
• At the end of the accounting period, the sales discounts account has accumulated all the sales discount for the period.
• The account is considered a contra-income account and deducted from gross sales in the income statement.
Sales Returns and Allowances The buyer may return the goods to the
seller for credit if the sale was made on account or for cash refund if the sale was for cash
The seller may just grant an allowance or deduction from the selling price
A high sales returns and allowances figure is not commendable because it may signal poor quality of goods and thus may result to dissatisfied customers
Each return or allowance is recorded as a debit to an account called sales returns and allowances.
9-17 Sales Returns and Allowances
760
Accounts Receivable (or Cash)
760
To record return or allowance on unsatisfactory merchandise
• The seller usually issues the customer a credit memorandum, which is a formal acknowledgement that the seller has reduced the amount owned by the customer.
• Sales returns and allowances is a contra-income account and is accordingly deducted from gross sales in the income statement
Transportation Out
When the freight term is FOB destination, the seller shoulders the transportation costs; when the term is FOB shipping point, the buyer bears the shipping costs
11-25 Accounts Receivable 17,000
Transportation Out 1,900
Sales 17,000
Cash 1,900
Sales on account; terms 2/10, n/30; FOB destination, freight prepaid, P1,900
Case1: Assume that an entity sold merchandise totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Cash 16,600
Sales Discount 340
Accounts Receivable 17,000
If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%). Transportation out is an operating expense.
11-25 Accounts Receivable 17,000
Sales 17,000Sold merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.
Case2: Assume that an entity sold merchandise totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Cash 16,600
Sales Discount 340
Accounts Receivable 17,000
If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%).
11-25 Accounts Receivable 15,100
Transportation out 1,900
Sales 17,000Sales on account; terms 2/10, n/30; FOB destination, freight collect, P1,900
Case3: Assume that an entity sold merchandise totaling P17,000 FOB destination, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Cash 14,760
Sales Discounts 340
Accounts Receivable 15,100
If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%) since the discount applies to total sales
11-25 Accounts Receivable 18,900Sales 17,000
Cash 1,900Sales on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900
Case4: Assume that an entity sold merchandise totaling P17,000 FOB shipping point, freight perpaid; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Cash 18,560
Sales Discounts 340
Accounts Receivable 18,900
If the invoice is collected on Dec 5, the sales discount will be P340 (P17,000 * 2%) since the discount applies to total sales
Cost of Goods Sold
Or cost of sales is the largest single expense of the merchandising business
Cost of inventory that the entity has sold to customers
Goods available for sale during the year = merchandise inventory at the beginning of the year + net purchases during the period
Entity sold all goods available for sale during a given acctg period, cost of goods sold = goods that had been available for sale
Actual cost of goods sold = goods available for sale - merchandise inventory at the end of the period
Corleto Delights
Partial Income Statement
For the Year Ended Dec. 31, 2000
Cost of Goods Sold
Merchandise Inventory, 1/1/00 528,000
Purchases 1,264,000
Less: Purchases Returns and Allowances 56,400
Purchases Discounts 21,360 77,760
1,186,240
Transportation In 82,360
Net Purchases 1,268,600
Goods Available for Sale 1,796,600
Less: Merchandise Inventory, 12/31/00 483,000
Cost of Goods Sold 1,313,600
Merchandise inventory
Consists of goods purchased for resale. Beginning inventory = merchandise
inventory at the start of the acctg period
Ending inventory = inventories at the end Merchandise inventory to be reported in
the balance sheet Beginning inventory of the next acctg
period
Net Purchases
Under periodic inventory method Net purchases = GP – (Pdra) + Tc
GP: gross purchases Pdra: purchases discounts, returns,
allowances Tc: transportation costs
Purchases Purchases account, a temporary
account, is used only for merchandise purchased for resale
Purpose: accumulate the total cost of merchandising purchased during an accounting period
At invoice price is known as the gross price method of recording purchases
11-12 Purchases 15,000
Accounts Payable 15,000To record purchases of merchandise; term 2/10, n/30.
All purchases of merchandise are debited to the purchases account as shown below
Purchases Returns and Allowances Is a contra account and is accordingly
deducted from purchases in the income statement
Cost that cannot be recovered, or lost sales resulting from poor ordering or unsaleable goods
11-14 Accounts Payable 2,000
Purchases R&A 2,000Return of damaged merchandise purchased on Nov 12.
Sales R&A in the seller’s books are recorded as purchases returns and allowances in the books of the buyer
Purchases Discounts Purchases are usually made on credit
and commonly involve purchases discounts for early payment
Is a contra account that is deducted from purchases on the income statement
Does not apply to transportation or other charges that might appear on the invoice
11-22 Accounts Payable 13,000
Purchases discount 260
Cash 12,740Record Purchases discount of (P13,000 * 2%)
In relation with the purchase last Nov 12, discount terms 2/10, n/30, and Nov 14 Purchases R&A
11-25 Purchases 17,000
Account Payable 17,000Purchased merchandise on account; terms 2/10, n/30; FOB destination, freight prepaid
Case1: Assume that an entity made purchases totaling P17,000 FOB destination, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900
Transportation IN
12-5 Accounts Payable 17,000
Purchase Discount 340
Cash 16,600
No debit to transportation in account since the shipping term provided that the seller should shoulder the transportation cost.
If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%).
11-25 Purchases 17,000
Transportation In 1,900
Accounts Payable 17,000
Cash 1,900Purchase merchandise on account; terms 2/10, n/30; FOB shipping point, freight collect.
Case2: Assume that an entity purchases merchandise totaling P17,000 FOB shipping point, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Accounts Payable 17,000
Purchases Discounts 340
Cash 16,660
If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%).
Transportation in will form part of net purchases.
11-25 Purchases 17,000
Account Payable 15,100
Cash 1,900Purchases on account; terms 2/10, n/30; FOB destination, freight collect, P1,900
Case3: Assume that an entity made purchases totaling P17,000 FOB destination, freight collect; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Accounts Payable 15,100
Purchases Discounts 340
Cash 14,760
Accounts payable is decreased by the transportation charges paid by the buyer for the benefit of the seller
If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%) since the discount applies to total purchases
11-25 Purchases 17,000
Transportation In 1,900Accounts Payable 18,900
Purchased merchandise on account; terms 2/10, n/30; FOB shipping point, freight prepaid, P1,900
Case4: Assume that an entity purchases merchandise totaling P17,000 FOB shipping point, freight prepaid; terms 2/10, n/30. the transportation cost amounted to P1,900
12-5 Accounts Payable 18,900
Purchases Discounts 340
Cash 18,560
If the invoice is paid on Dec 5, the purchases discount will be P340 (P17,000 * 2%) since the discount applies to total sales
Buyer not entitled to discounts on the transportation costs.
Discounts apply only to total purchases.
Operating Expenses
Make up the third major part of the income statement for a merchandising entity
Expenses other than the cost of goods sold, which are incurred to generate income from the entity’s ,major line of business-merchandising
Categories: Selling, Administrative, Other operating expenses
Selling: related directly to the entity’s efforts to generates sales Payroll accounts, advertising, traveling, store
supplies used, depreciation, transportation out
Administrative: related to the general administration of the business Officers and office salaries, office supplies,
depreciation, business taxes, professional services, uncollectible accounts and other general office expenses
Other operating: are not related to the central operations of the business Expenses and loses from peripheral or
incidental transactions of the enterprise; for example, loss on sale of investments or loss on sale of property and equipment