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Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/e 1 of 64 Chapter 4, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University.

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Presentation on theme: "Visit UMT online at www.umtweb.edu© South-Western 2004 Survey of Accounting, 2/e 1 of 64 Chapter 4, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University."— Presentation transcript:

1 Visit UMT online at South-Western 2004 Survey of Accounting, 2/e 1 of 64 Chapter 4, ACCT125 ACCOUNTING FUNDAMENTALS FOR MANAGERS University of Management and Technology 1901 North Fort Myer Drive Arlington, VA Voice: (703) Fax: (703) Website:

2 2 of 64Visit UMT online at Chapter 4, ACCT125 Task Force Clip Art included in this electronic presentation is used with the permission of New Vision Technology of Nepean Ontario, Canada.

3 Visit UMT online at South-Western 2004 Survey of Accounting, 2/e 3 of 64 Chapter 4, ACCT125 Chapter 4 Accounting for Merchandise Operations

4 4 of 64Visit UMT online at Chapter 4, ACCT125 After studying this chapter, you should be able to: ContinuedContinued Learning Objectives 1.Distinguish the operating activities of a service business from those of a merchandising business. 2.Describe and illustrate the financial statements of a merchandising business. 3.Describe the accounting for the sale of merchandise. 4.Describe the accounting for the purchase of merchandise.

5 5 of 64Visit UMT online at Chapter 4, ACCT125 Learning Objectives 5.Describe the accounting for transportation costs and sales taxes. 6.Illustrate the dual nature of merchandising transactions. 7.Describe the accounting for merchandise shrinkage. 8.Describe and illustrate the use of gross profit and operating income in analyzing a companys operations.

6 6 of 64Visit UMT online at Chapter 4, ACCT125 1 Distinguish the operating activities of a service business from those of a merchandising business. Learning Objectives

7 7 of 64Visit UMT online at Chapter 4, ACCT125 In prior chapters, you were introduced to how to report the financial condition and changes in financial condition for a service business.

8 8 of 64Visit UMT online at Chapter 4, ACCT125 In this chapter, you will be exposed to the accounting for merchandise operations.

9 Home Depot Inc. Condensed Income Statement For the Year Ending December 28, 2001 (in millions) Net sales$45,738 Cost of merchandise sold 32,057 Gross profit$13,681 Operating expenses 9,490 Operating income$ 4,191 Other income 26 Income before taxes$ 4,217 Income taxes 1,636 Net income$ 2,581 Home Depot Inc. Condensed Income Statement For the Year Ending December 28, 2001 (in millions) Net sales$45,738 Cost of merchandise sold 32,057 Gross profit$13,681 Operating expenses 9,490 Operating income$ 4,191 Other income 26 Income before taxes$ 4,217 Income taxes 1,636 Net income$ 2,581 The revenue account for merchandise is Sales. The cost of merchandise sold is matched against net sales. Net sales is the revenue received from selling merchandise less any merchandise returned or any discounts reported. Revenue minus cost provides gross profit. Whats different on a merchandising income statement?

10 10 of 64Visit UMT online at Chapter 4, ACCT125 Describe and illustrate the financial statements of a merchandising business. 2 Learning Objectives

11 11 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions Income Statement For the Year Ended December 31, 2007 Net sales$708,255 Cost of merchandise sold 525,305 Gross profit$182,950 Operating expenses 105,710 Operating income$ 77,240 Other income and expense (net) (1,840) Operating income before taxes$ 75,400 Income taxes 15,000 Net income$ 60,400 Multiple-Step Income Statement

12 12 of 64Visit UMT online at Chapter 4, ACCT125 Sales$720,185 Less sales returns and allowances$6,140 Less sales discounts 5,790 11,930 Net sales$708,255 Sales is the total amount the customers are charged for merchandise sold, including cash sales and sales on account. Detailed Revenue Section Multiple-Step Income Statement

13 13 of 64Visit UMT online at Chapter 4, ACCT125 Sales$720,185 Less sales returns and allowances$6,140 Less sales discounts 5,790 11,930 Net sales$708,255 Sales returns and allowances are granted by the seller for damaged or defective merchandise. Multiple-Step Income Statement

14 14 of 64Visit UMT online at Chapter 4, ACCT125 Sales$720,185 Less sales returns and allowances$6,140 Less sales discounts 5,790 11,930 Net sales$708,255 Sales discounts are granted by the seller to customers for early payment of amounts owed. Multiple-Step Income Statement

15 15 of 64Visit UMT online at Chapter 4, ACCT125 Purchases$521,980 Less: Purchases returns and allowances $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755 Purchases is the full cost of buying merchandise for resale. Detailed Cost of Merchandise Purchased Section Multiple-Step Income Statement

16 16 of 64Visit UMT online at Chapter 4, ACCT125 Purchases$521,980 Less: Purchases returns and allowances $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755 A Purchase return is the cost of the merchandise returned to the seller. A Purchase allowance is a reduction in purchase price because the item has a defect or was the wrong item ordered. Multiple-Step Income Statement

17 17 of 64Visit UMT online at Chapter 4, ACCT125 Purchases$521,980 Less: Purchases returns and allowances $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755 A Purchase discount is a reduction in the initial cost of the merchandise. Usually, it is due to early payment of the debt. Multiple-Step Income Statement

18 18 of 64Visit UMT online at Chapter 4, ACCT125 Purchases$521,980 Less: Purchases returns and allowances $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755 Transportation-in is the shipping cost paid by the buyer for merchandise. Note that this freight payment increases the cost of the merchandise. It is not an expense. Multiple-Step Income Statement

19 19 of 64Visit UMT online at Chapter 4, ACCT125 Cost of merchandise purchased is a major portion of the cost of merchandise sold section, which follows the revenue section. Multiple-Step Income Statement

20 20 of 64Visit UMT online at Chapter 4, ACCT125 Note on the next slide that the only change is that the section begins by adding the beginning inventory and ends by subtracting the ending inventory. Multiple-Step Income Statement

21 21 of 64Visit UMT online at Chapter 4, ACCT125 Merchandise inventory, Jan. 1, 2007$ 59,700 Purchases$521,980 Less: Pur. returns and allow. $9,100 Purchases discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased 527,755 Merchandise available for sale$587,455 Less merchandise inventory, Dec. 31, ,150 Cost of merchandise sold$525,305 Detailed Cost of Merchandise Sold Section Multiple-Step Income Statement

22 22 of 64Visit UMT online at Chapter 4, ACCT125 This income statement was prepared using the periodic inventory method. The number of units on hand was determined by a physical count. Multiple-Step Income Statement

23 23 of 64Visit UMT online at Chapter 4, ACCT125 In contrast, a perpetual inventory system keeps a running amount for each item as it is bought and sold. A physical count is still necessary for verification purposes. Multiple-Step Income Statement

24 24 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions Income Statement For the Year Ended December 31, 2007 Revenue: Net sales$708,255 Expenses: Cost of merchandise sold$525,305 Operating expenses 105,710 Income taxes 15,000 Other income and expense (net) 1, ,855 Net income$ 60,400 Single-Step Income Statement

25 25 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions Retained Earnings Statement For the Year Ended December 31, 2007 Retained earnings, January 1, 2007$128,800 Net income for the year$60,400 Less dividends 18,000 Increase in retained earnings 42,400 Retained earning, December 31, 2007$171,200 Retained Earnings Statement

26 26 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions Balance Sheet December 31, 2007 Assets Current assets: Cash $ 52,950 Accounts receivable76,080 Merchandise inventory62,150 Office supplies480 Prepaid insurance 2,650 Total current assets$194,310 ContinuedContinued Balance Sheet

27 27 of 64Visit UMT online at Chapter 4, ACCT125 Property, plant, and equipment: Land$ 20,000 Store equipment$27,100 less accumulated depr. 5,70021,400 Office equipment$15,570 less accumulated depr. 4,720 10,850 Total property, plant, and equip. 52,250 Total assets$246,560 Liabilities Current liabilities: Accounts payable$ 22,420 Note payable5,000 Salaries payable1,140 Unearned rent 1,800 Total current liabilities$ 30,360 ContinuedContinued

28 28 of 64Visit UMT online at Chapter 4, ACCT125 Long-term liabilities: Note payable (final payment due 2017) 20,000 Total liabilities$ 50,360 Stockholders Equity Capital stock$ 25,000 Retained earnings 171, ,200 Total liabilities and stockholders equity$246,560

29 29 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions Statement of Cash Flows For the Year Ended December 31, 2007 Cash flows from operating activities: Net income$ 60,400 Add: Depreciation expensestore equipment$ 3,100 Depreciation expenseoffice equipment2,490 Decrease in office supplies120 Decrease in prepaid insurance350 Increase in accounts payable 8,15014,210 ContinuedContinued Statement of Cash Flows

30 30 of 64Visit UMT online at Chapter 4, ACCT125 Deduct: Increase in accounts receivable$(24,080) Increase in merchandise inventory(2,450) Decrease in salaries payable(360) Decrease in unearned rent (600) (27,400) Net cash flow form operating activities$47,120 Cash flows from investing activities: Purchase of store equipment$ (7,100) Purchase of office equipment (5,570) Net cash flows used in investing activities (12,670) Cash flows from financing activities: Payment of note payable$ (5,000) Payment of dividends (18,000) Net cash flows used in financing activities (23,000) Net increase in cash$11,450 January 1, 2007 cash balance 41,500 December 31, 2007 cash balance$ 52,950

31 31 of 64Visit UMT online at Chapter 4, ACCT125 Describe the accounting for the sale of merchandise. 3 Learning Objective

32 32 of 64Visit UMT online at Chapter 4, ACCT125 On January 3 Online Solutions sells merchandise costing $1,200 for $1,800. The customer charges the purchase on a MasterCard. Transactions involving MasterCard or Visa are treated as cash sales.

33 33 of 64Visit UMT online at Chapter 4, ACCT125 Cash sales of $1,800 on January 3; cost of merchandise sold, $1,200.

34 34 of 64Visit UMT online at Chapter 4, ACCT125 2/10, n/30 Credit Terms The buyer is allowed a 2% discount if… …the account is paid within 10 days. The net (full) amount is due by the 30 th day. Sales Discounts

35 35 of 64Visit UMT online at Chapter 4, ACCT125 On January 12 Online Solutions sells merchandise on account to Omega Tech for $1,500. Credit terms are 2/10, n/30. Sales Discounts

36 36 of 64Visit UMT online at Chapter 4, ACCT125 Payment is received from Omega Tech on January 22. Sales Discounts

37 37 of 64Visit UMT online at Chapter 4, ACCT125 On January 13 Online Solutions issues a $2,000 credit memorandum to Krier Company for merchandise that was returned. The merchandise (cost $1,200) was sold on account. Sales Returns and Allowances

38 38 of 64Visit UMT online at Chapter 4, ACCT125 Describe the accounting for the purchase of merchandise. 4 Learning Objective

39 39 of 64Visit UMT online at Chapter 4, ACCT125 On January 6 Online Solutions purchased $2,500 of merchandise on account (terms: 1/15, n/30). Recall that Online Solutions uses the perpetual system.

40 40 of 64Visit UMT online at Chapter 4, ACCT125 On January 21 Online Solutions pays invoice of $1,800, terms 1/15, n/30 within the discount period. Purchase Discounts

41 41 of 64Visit UMT online at Chapter 4, ACCT125 On January 22 Online Solutions returns $5,000 of merchandise purchased from Quantum Inc. Purchase Returns and Allowances

42 42 of 64Visit UMT online at Chapter 4, ACCT125 Describe the accounting for transportation costs and sales taxes. 5 Learning Objective

43 43 of 64Visit UMT online at Chapter 4, ACCT125 Phil s Truck i n g Transportation Costs

44 44 of 64Visit UMT online at Chapter 4, ACCT125

45 45 of 64Visit UMT online at Chapter 4, ACCT125 On January 19 Online Solutions buys merchandise from Data Max on account, $2,900, terms FOB shipping point, and prepays the transportation cost of $150. Transportation Costs

46 46 of 64Visit UMT online at Chapter 4, ACCT125 Illustrate the dual nature of merchandising transactions. 6 Learning Objective

47 47 of 64Visit UMT online at Chapter 4, ACCT125 Scully Co. (Seller) July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise sold was $4,500

48 48 of 64Visit UMT online at Chapter 4, ACCT125 July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB destination; 2/10, n/30. The cost of the merchandise sold was $4,500 Burton Co. (Buyer)

49 49 of 64Visit UMT online at Chapter 4, ACCT125 July 5. Scully Company. paid transportation charges of $300 on July 1 sale to Burton Co. Scully Co. (Seller) Burton Co. (Buyer) No effect.

50 50 of 64Visit UMT online at Chapter 4, ACCT125 July 6. Scully Company issued Burton Co. a credit memorandum for merchandise returned, $1,000. The merchandise had been purchased by Burton Co. on account on July 1. The cost of the merchandise returned was $600. Scully Co. (Seller)

51 51 of 64Visit UMT online at Chapter 4, ACCT125 July 6. Scully Company issued Burton Co. a credit memorandum for merchandise returned, $1,000. The merchandise had been purchased by Burton Co. on account on July 1. The cost of the merchandise returned was $600. Burton Co. (Buyer)

52 52 of 64Visit UMT online at Chapter 4, ACCT125 July 11. Scully Company received payment from Burton Co. for purchase of July 11, less discount (2% x $6,500). Scully Co. (Seller)

53 53 of 64Visit UMT online at Chapter 4, ACCT125 July 11. Scully Company received payment from Burton Co. for purchase of July 11, less discount (2% x $6,500). Burton Co. (Buyer)

54 54 of 64Visit UMT online at Chapter 4, ACCT125 Describe the accounting for merchandise shrinkage. 7 Learning Objective

55 55 of 64Visit UMT online at Chapter 4, ACCT125 When a company uses a perpetual inventory, a physical count is taken at the end of the accounting period to determine the accuracy of the perpetual records and to record any inventory shrinkage.

56 56 of 64Visit UMT online at Chapter 4, ACCT125 Online Solutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical inventory taken on that date indicates that only $62,150 of merchandise is available for sale. Inventory shrinkage is $1,800

57 57 of 64Visit UMT online at Chapter 4, ACCT125 Describe and illustrate the use of gross profit and operating income in analyzing a companys operations. 8 Learning Objective

58 58 of 64Visit UMT online at Chapter 4, ACCT125 Gross profit and operating income are two important profitability measures analyst use in assessing… …the efficiency and effectiveness of a merchandisers operations.

59 59 of 64Visit UMT online at Chapter 4, ACCT125 Net sales$32,004 Cost of merchandise sold 22,789 Gross profit$ 9,215 Operating expenses 8,459 Operating income$ 756 $9,2l5 $32,004 = 28.8% Gross Profit Percent

60 60 of 64Visit UMT online at Chapter 4, ACCT125 J. C. Penneys gross profit percentage went from 28.8% to 27.7%, then recovered back to 29.8%. Gross Profit Percent

61 61 of 64Visit UMT online at Chapter 4, ACCT125 The recovery in the third year was attributed to better merchandise assortment, improved inventory productivity, and centralized buying. Gross Profit Percent

62 62 of 64Visit UMT online at Chapter 4, ACCT125 Net sales$32,004 Cost of merchandise sold 22,789 Gross profit$ 9,215 Operating expenses 8,459 Operating income$ 756 $756 $32,004 = 2.4% Operating Income Percent

63 63 of 64Visit UMT online at Chapter 4, ACCT125 The companys operating income percentage dropped from 2.4% to 0.6%, then recovered back to 2.7%. Operating Income Percent

64 64 of 64Visit UMT online at Chapter 4, ACCT125 This recovery was attributed to lower catalog and marketing costs, lower telemarketing costs, and a shift from development to maintenance of JCPenney.com. Operating Income Percent


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