1. Previous Lecture Operating Cycle of a Merchandising Company Comparing Merchandising Activities with Manufacturing Activities Retailers and Wholesalers Income Statement of a Merchandising Company What Accounting Information Does a Merchandising Company Need? General Ledger Accounts Subsidiary Ledgers: A Source of Needed Details Two Approaches Used in Accounting for Merchandise Transactions 1

2. Previous Lecture Perpetual Inventory System Taking a Physical Inventory Closing Entries in a Perpetual Inventory System Periodic Inventory System Computing Cost of Goods Sold in a Periodic Inventory System Comparison of Perpetual and Periodic Inventory Systems 2

3. Cash Terms and Cash Discounts 3

4. Credit Terms and Cash Discounts 2/10, n/30 Read as: “Two ten, net thirty” When manufacturers and wholesalers sell their products on account, the credit terms are stated in the invoice. 4

5. Credit Terms and Cash Discounts 2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due 5

6. Credit Terms and Cash Discounts Purchases are recorded at their net amounts. Purchase discounts lost are recorded when payment is made outside the discount period. Net Method 6

7. Credit Terms and Cash Discounts On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. 7

8. Credit Terms and Cash Discounts $4,000  98% = $3,920 On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. 8

9. Credit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. 9

10. Credit Terms and Cash Discounts On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. 10

11. Credit Terms and Cash Discounts Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes. 11

12. Credit Terms and Cash Discounts Now, assume that Play Clothes waited until July 20 to pay the amount due in full to Kid’s Clothes. Prepare the journal entry for Play Clothes. Nonoperating Expense 12

13. Recording Purchases at Gross Invoice Price Purchases are recorded at their gross amounts. Purchase discounts taken are recorded when payment is made inside the discount period. Gross Method 13

14. Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. 14

15. Recording Purchases at Gross Invoice Price On July 6, Play Clothes purchased $4,000 of merchandise on credit with terms of 2/10, n/30 from Kid’s Clothes. Prepare the journal entry for Play Clothes. 15

16. Recording Purchases at Gross Invoice Price On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. 16

17. Recording Purchases at Gross Invoice Price On July 15, Play Clothes pays the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. Reduces Cost of Goods Sold $4,000  98% = $3,920 17

18. Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. 18

19. Recording Purchases at Gross Invoice Price Now, assume that Play Clothes waited until July 20 to pay the full amount due to Kid’s Clothes. Prepare the journal entry for Play Clothes. 19

20. Returns of Unsatisfactory Merchandise On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes. 20

21. Returns of Unsatisfactory Merchandise On August 5, Play Clothes returned $500 of unsatisfactory merchandise purchased from Kid’s Clothes on credit terms of 2/10, n/30. The purchase was originally recorded at net cost. Prepare the journal entry for Play Clothes. $500  98% = $490 21

22. Transportation Costs on Purchases Transportation costs related to the acquisition of assets are part of the cost of the asset being acquired. 22

23. Now, let’s talk about sales! 23

24. Transactions Relating to Sales Credit terms and merchandise returns affect the amount of revenue earned by the seller. 24

25. Sales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. 25

26. Sales Returns and Allowances On August 2, Kid’s Clothes sold $2,000 of merchandise to Play Clothes on credit terms 2/10, n/30. Kid’s Clothes originally paid $1,000 for the merchandise. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. 26

27. Sales Returns and Allowances On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. Contra-revenue 27

28. Sales Returns and Allowances On August 5, Play Clothes returned $500 of unsatisfactory merchandise to Kid’s Clothes from the August 2 sale. Kid’s Clothes cost for this merchandise was $250. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. 28

29. Sales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. 29

30. Sales Discounts On July 6, Kid’s Clothes sold $4,000 of merchandise to Play Clothes on credit with terms of 2/10, n/30. The merchandise originally cost Kid’s Clothes $2,000. Because Kid’s Clothes uses a perpetual inventory system, they must make two entries. 30

31. Sales Discounts On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes. 31

32. Sales Discounts On July 15, Kid’s Clothes receives the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes. $4,000  98% = $3,920 Contra-revenue 32

33. Sales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes. 33

34. Sales Discounts Now, assume that it wasn’t until July 20 that Kid’s Clothes received the full amount due from Play Clothes. Prepare the journal entry for Kid’s Clothes. 34

35. Delivery Expenses Delivery costs incurred by sellers are debited to Delivery Expense, an operating expense. 35

36. Accounting for Sales Taxes Businesses collect sales tax at the point of sale. Then, they remit the tax to the appropriate governmental agency at times specified by law. $1,000 sale  7% tax = $70 sales tax 36

37. Evaluating the Performance of a Merchandising Company Net Sales Gross Profit Margins Trends overtime Comparable store sales Sales per square foot of selling space Trends overtime Comparable store sales Sales per square foot of selling space Gross Profit  Net Sales Overall Gross Profit Margin Gross Profit Margins by Department and Products Gross Profit  Net Sales Overall Gross Profit Margin Gross Profit Margins by Department and Products 37

38. Net Sales Trends overtime: Most investor & Business managers consider the trend in net sale to be a key indicator of both past performance and future prospects. Comparable store sales: Indicates weather customer demand is rising or falling at established locations Sales per square foot of selling space: A measure of how effectively the company is using its physical facilities(floor space in supermarkets, shelf space etc 38

39. Gross Profit Margins Gross Profit Margins: Increasing net sale is not enough to ensure increasing profitability. Some products are more profitable than others, In evaluating the profitability of sale transaction, manager and investors keep a close eye on company’s gross profit margin that is gross profit ÷ net sales. Overall Gross Profit Margin: A company which have many department. Gross Profit Margins by Department and Products: performance of each Department. 39

40. End of Chapter 6 40