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Chapter 5-1 The Operating Cycle and Merchandising Operations Financial Accounting, Tenth Edition.

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Presentation on theme: "Chapter 5-1 The Operating Cycle and Merchandising Operations Financial Accounting, Tenth Edition."— Presentation transcript:

1 Chapter 5-1 The Operating Cycle and Merchandising Operations Financial Accounting, Tenth Edition

2 Chapter 5-2 Merchandising Operations SO 1 Identify the differences between service and merchandising companies. Merchandising Companies Buy and Sell Goods WholesalerRetailerConsumer The primary source of revenues is referred to as sales revenue or sales.

3 Chapter 5-3 Merchandising Operations SO 1 Identify the differences between service and merchandising companies. Income Measurement Cost of goods sold is the total cost of merchandise sold during the period. Not used in a Service business. Net Income (Loss) Less Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Illustration 5-1 Income measurement process for a merchandising company

4 Chapter 5-4 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Illustration 5-2 SO 1 Identify the differences between service and merchandising companies. Operating Cycles Merchandising Operations

5 Chapter 5-5 Flow of Costs Companies use either a perpetual inventory system or a periodic inventory system to account for inventory. SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Illustration 5-3

6 Chapter 5-6 Perpetual System SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs Maintain detailed records of the cost of each inventory purchase and sale. Records continuously show inventory that should be on hand. Company determines cost of goods sold each time a sale occurs.

7 Chapter 5-7 Periodic System Do not keep detailed records of the goods on hand. Determine cost of goods sold only at end of accounting period. Physical inventory count to determine cost of goods on hand. Calculation of Cost of Goods Sold: Beginning inventory$ 100,000 Add: Purchases, net800,000 Goods available for sale900,000 Less: Ending inventory125,000 Cost of goods sold$ 775,000 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs

8 Chapter 5-8 Additional Consideration Perpetual System:  Traditionally used for merchandise with high unit values.  Provides better control over inventories.  Requires additional clerical work and additional cost to maintain inventory records. SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs

9 Chapter 5-9

10 Chapter 5-10 Made using cash or credit (on account). Normally recorded when goods are received. Purchase invoice should support each credit purchase. Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration 5-5

11 Chapter 5-11 Illustration: Illustration: Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry for Sauk Stereo for the invoice from PW Audio Supply. May 4 SO 2 Explain the recording of purchases under a perpetual inventory system. Recording Purchases of Merchandise Illustration 5-5

12 Chapter 5-12 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. Recording Purchases of Merchandise Freight Costs – Terms of Sale Freight costs incurred by the seller are an operating expense.

13 Chapter 5-13 Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Haul-It Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is: May 6 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. 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 Supply would have been: May 4

14 Chapter 5-14 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchases of Merchandise 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 SO 2 Explain the recording of purchases under a perpetual inventory system.

15 Chapter 5-15 In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting: a.Purchases b.Purchase Returns c.Purchase Allowance d.Merchandise Inventory Question Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

16 Chapter 5-16 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. May 8

17 Chapter 5-17 Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase Discounts Recording Purchases of Merchandise Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days. Otherwise, net amount due within 30 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

18 Chapter 5-18 Purchase Discounts - Terms Recording Purchases of Merchandise 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/301/10 EOM Net amount due within the first 10 days of the next month. n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system.

19 Chapter 5-19 May 14 Recording Purchases of Merchandise (Discount = $3,500 x 2% = $70) SO 2 Explain the recording of purchases under a perpetual inventory system. 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 makes to record its May 14 payment.

20 Chapter 5-20 June 3 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. 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:

21 Chapter 5-21 Should discounts be taken when offered? Purchase Discounts Recording Purchases of Merchandise Example: 2% for 20 days = Annual rate of 36.5% (365/20 = twenty-day periods x 2% = 36.5%) Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

22 Chapter 5-22 $3,5008 th - Return$300 Balance 4 th - Purchase $3, th - Discount Recording Purchases of Merchandise Summary of Purchasing Transactions 1506 th – Freight-in Illustration SO 2 Explain the recording of purchases under a perpetual inventory system.

23 Chapter 5-23 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 Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Illustration 5-5

24 Chapter 5-24 Two Journal Entries to Record a Sale Cash or Accounts receivableXXX Sales XXX Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost

25 Chapter 5-25 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. May 4 Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo on account (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply $2,400. 4

26 Chapter 5-26 “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 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

27 Chapter 5-27 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. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. May 8 8

28 Chapter 5-28 Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries: Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 300May 8 Accounts receivable300 8

29 Chapter 5-29 The cost of goods sold is determined and recorded each time a sale occurs in: a.periodic inventory system only. b.a perpetual inventory system only. c.both a periodic and perpetual inventory system. d.neither a periodic nor perpetual inventory system. Review Question Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

30 Chapter 5-30

31 Chapter 5-31 Offered to customers to promote prompt payment. “Flipside” of purchase discount. Contra-revenue account (debit). Sales Discount Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

32 Chapter 5-32 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. May 14 * [($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.

33 Chapter 5-33 Income Statement Presentation Illustration 5-11

34 Chapter 5-34

35 Chapter 5-35 No running account of changes in inventory. Ending inventory determined by physical count. Directly adjust Merchandise Inventory account for any transaction that affects inventory. SO 5 Determine cost of goods sold under a periodic system. Determining Cost of Goods Sold Under a Periodic System Income Statement Presentation

36 Chapter 5-36 SO 5 Determine cost of goods sold under a periodic system. Determining Cost of Goods Sold Under a Periodic System Income Statement Presentation Illustration 5-13 Cost of goods sold for a merchandiser using a periodic inventory system

37 Chapter 5-37 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Record revenues when sales are made. Do not record cost of merchandise sold on the date of sale. Physical inventory count at the end of the period to determine: 1.cost of merchandise on hand and 2.cost of goods sold during the period. Record purchases of merchandise in Purchases account. Purchase returns and allowances, Purchase discounts, and Freight costs are recorded in separate accounts. Periodic Inventory System Recording Merchandise Transactions

38 Chapter 5-38 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows. Purchases3,800May 4 Accounts payable 3,800 Periodic Inventory System Recording Purchases of Merchandise

39 Chapter 5-39 Illustration: Illustration: If Sauk pays Haul-It Freight Company $150 for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is: Freight-in (Transportation-in)150May 6 Cash 150 Freight Costs SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

40 Chapter 5-40 Illustration: Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return. Accounts payable300May 8 Purchase returns and allowances 300 Purchase Returns and Allowances SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

41 Chapter 5-41 Illustration: Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. Sauk Stereo records the payment and discount as follows. Accounts payable3,500May 14 Purchase discounts 70 Purchase Discounts Cash 3,430 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

42 Chapter 5-42 No entry is recorded for cost of goods sold at the time of the sale under a periodic system. Illustration: Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows. Accounts receivable3,800May 4 Sales 3,800 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System Recording Sales of Merchandise

43 Chapter 5-43 Illustration: Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows. Sales returns and allowances300May 4 Accounts receivable 300 Sales Returns and Allowances SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

44 Chapter 5-44 Illustration: Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows. Sales Discounts Cash3,430May 14 Accounts receivable3,500 Sales discounts70 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

45 Chapter 5-45 Comparison of Entries—Perpetual Vs. Periodic SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system.

46 Chapter 5-46 SO 8 Explain the recording of purchases and sales of inventory under a periodic inventory system. Comparison of Entries—Perpetual Vs. Periodic

47 Chapter 5-47 “Copyright © 2009 John Wiley & Sons, Inc. All rights reserved. Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc. The purchaser may make back-up copies for his/her own use only and not for distribution or resale. The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” CopyrightCopyright


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