slide 5-1 chapter 5 accounting for merchandising operations financial accounting, ifrs edition...

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Chapter 5

Accounting for Accounting for Merchandising Merchandising

OperationsOperations

Financial Accounting, IFRS EditionWeygandt Kimmel Kieso

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Merchandising OperationsMerchandising OperationsMerchandising OperationsMerchandising Operations

Income MeasurementIncome Measurement

Illustration 5-1

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

the period.

Not used in a Service business.

Net Income (Loss)

Less

Less=

=

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.

3 SO 1 Identify the differences between service and merchandising companies.SO 1 Identify the differences between service and merchandising companies.


Flow of CostsIllustration 5-3

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Perpetual System

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 of Merchandise Inventory and Cost of Goods Sold.



Flow of Costs

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1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.

3. Calculation of Cost of Goods Sold:

Beginning inventory

$ 100,000

Add: Purchases, net

+ 800,000

Goods available for sale

900,000

Less: Ending inventory

- 125,000

Cost of goods sold

$ 775,000



Flow of Costs

Periodic System

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Made using cash or credit (on account).

Normally recorded when goods are received.

Purchase invoice should support each credit purchase.

Recording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of MerchandiseRecording Purchases of Merchandise

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

Illustration 5-5

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Under the perpetual inventory system, companies

record in the Merchandise Inventory account the purchase of goods they intend to sell.

Illustration:Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo (Pembeli) would make to record its purchase from PW Audio Supply.

Merchandise inventory 3,800May 4

Accounts payable 3,800



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Illustration 5-6

Seller places goods Free On Board the carrier, and buyer

pays freight costs.

Seller places goods Free On Board to the buyer’s place

of business, and seller pays freight costs.


Freight Costs – Terms of Sale– Terms of Sale

Freight costs incurred by the seller are an operating expense. SO 2SO 2

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Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company €150 for freight charges, the entry on Sauk Stereo’s (Pembeli) books is:

Merchandise inventory 150May 6

Cash 150



Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio (Penjual) Supply would have been:

Freight-out (or Delivery Expense) 150May 4

Cash 150

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Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.

Purchase Returns and Allowances


Return goods for credit if the sale was made on

credit, or for a cash refund if the purchase was for

cash.

May choose to keep the merchandise if the seller will grant an allowance

(deduction) from the purchase price.

Purchase Return Purchase Allowance


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Illustration: Assume that on May 8 Sauk Stereo (Pembeli) returned to PW Audio Supply goods costing €300.

Accounts payable 300May 8

Merchandise inventory 300

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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


Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days.


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Purchase Discount Terms


2% discount if

paid within 10

days, otherwise

net amount due

within 30 days.

1% discount if

paid within first 10

days of next

month.

2/10, n/30 1/10 EOM

Net amount due

within the first 10

days of the next

month.

n/10 EOM


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Merchandise Inventory 70

Accounts payable 3,500May 14



Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry Sauk (Pembeli) makes to record its May 14 payment.

Cash 3,430

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Accounts payable 3,500June 3


Cash 3,500


Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of €3,500 on June 3, the journal entry would be:

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Made for cash or credit (on account).

Normally recorded when earned, usually when goods transfer from seller to buyer.

Sales invoice should support each credit sale.

Recording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of MerchandiseRecording Sales of Merchandise

SO 3 Explain the recording of sales revenues SO 3 Explain the recording of sales revenues under a perpetual inventory system.under a perpetual inventory system.

Illustration 5-5

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Two Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales XXX



#1

Cost of goods sold XXX

Merchandise inventory XXX

#2

Selling Price

Cost

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Accounts receivable 3,800May 4

Sales 3,800

Illustration: Assume PW Audio Supply (Penjual) records its May 4 sale of €3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply €2,400.

Cost of goods sold 2,4004

Merchandise inventory 2,400

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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



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Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a €300 selling price (assume a €140 cost). Assume the goods were not defective.



Sales returns and allowances 300May 8

Accounts receivable300


Cost of goods sold140

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Illustration: Assume the returned goods were defective and had a scrap value of €50, PW Audio would make the following entries:



Sales returns and allowances 300May 8

Accounts receivable300


Cost of goods sold50

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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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Cash 3,430May 14

Accounts receivable3,500

Sales discounts 70

* [(€3,800 – €300) X 2%]

*

Illustration: Assume Sauk Stereo pays the balance due of €3,500 (gross invoice price of €3,800 less purchase returns and allowances of €300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.

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Generally the same as a service company.

One additional adjustment to make the records agree

with the actual inventory on hand.

Involves adjusting Merchandise Inventory and Cost of Goods Sold.

Adjusting Entries

Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising company.SO 4 Explain the steps in the accounting cycle for a merchandising company.

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Completing the Accounting CycleCompleting the Accounting CycleCompleting the Accounting CycleCompleting the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising company.SO 4 Explain the steps in the accounting cycle for a merchandising company.

Illustration: Suppose that PW Audio Supply has an unadjusted balance of €40,500 in Merchandise Inventory. Through a physical count, PW Audio determines that its actual merchandise inventory at year-end is €40,000. The company would make an adjusting entry as follows.

Cost of goods sold 500

Merchandise inventory500

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Primary source for evaluating a company’s

performance.

Format designed to differentiate between the various

sources of income and expense.

Income Statement

Forms of Financial StatementsForms of Financial StatementsForms of Financial StatementsForms of Financial Statements

SO 5 Prepare an income statement for a merchandiser.SO 5 Prepare an income statement for a merchandiser.

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Illustration 5-13

Income Statement Presentation of Sales


SO 5 Prepare an income statement for a merchandiser.SO 5 Prepare an income statement for a merchandiser.

28 SO 6 Explain the computation and importance of gross profit.SO 6 Explain the computation and importance of gross profit.

Illustration 5-13

Illustration 5-10

Gross Profit


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Forms of Forms of Financial Financial StatementsStatements


SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.

Illustration 5-13

Operating Expenses

IFRS allows presentation by nature and presentation by function.

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Other Income Other Income and Expenseand Expense

SO 5SO 5Illustration 5-13

Various revenues and gains and expenses andlosses that are unrelated to the company’s main line of operations.

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Interest Interest ExpenseExpense

SO 5SO 5Illustration 5-13

Interest expense, if material, must be disclosed on the face of the income statement.

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Illustration 5-15

Classified Statement of Financial Position

SO 5 Distinguish between a multiple-step and a single-step income statement.SO 5 Distinguish between a multiple-step and a single-step income statement.

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Periodic System

Separate accounts used to record purchases, freight costs, returns, and discounts.

Company does not maintain a running account of changes in inventory.

Ending inventory determined by physical count.

SO 7 Explain the recording of purchases and sales of SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.inventory under a periodic inventory system.

Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

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Illustration 5A-2

Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic

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Illustration 5A-2

Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic Comparison of Entries-Perpetual vs. Periodic

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Calculation of Cost of Goods SoldIllustration 5A-1


Periodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory SystemPeriodic Inventory System

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