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Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5.

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Presentation on theme: "Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5."— Presentation transcript:

1 Slide 5-1 Accounting for Merchandising Operations Financial Accounting, Seventh Edition Chapter 5

2 Slide 5-2 Service organizations provide a service to earn revenue. Examples: Google, Verizon, Fox, Marriott, ESPN. Service organizations provide a service to earn revenue. Examples: Google, Verizon, Fox, Marriott, ESPN. Revenues Expenses Minus Net income Equals Service Activities How has the NETFLIX business model changed over time?

3 Slide 5-3 Merchandising Operations Merchandising Companies Buy and Sell Goods WholesalerRetailerConsumer The primary source of revenues is referred to as sales revenue or sales.

4 Slide 5-4 Merchandising Operations Income Measurement Cost of goods sold (an Expense) is the total cost of merchandise sold during the period. Not used in a Service business. Operating Income (Loss) Less Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses

5 Slide 5-5 Reporting Income of Merchandising Company WAL-MART STORES, Inc. Consolidated Statement of Income For the year ended January 31, 2012 (all amounts in millions)

6 Slide 5-6 Reporting Income of Merchandising Company BEST BUY COMPANY, Inc. Consolidated Statement of Income For the year ended March 3, 2012 (all amounts in millions of dollars)

7 Slide 5-7 How Big is WAL-MART?

8 Slide 5-8 Knowledge Check Question: In its income statement, a company reported operating expenses of $157,000. Determine sales and gross profit given cost of goods sold was $544,000 and operating loss was $41,000. 1. Sales: $660,000; Gross Profit: $503,000. 2. Sales: $742,000; Gross Profit: $198,000. 3. Sales: $742,000; Gross Profit: $585,000. 4. Sales: $660,000; Gross Profit: $116,000.

9 Slide 5-9 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. Merchandising Operations Flow of Costs

10 Slide 5-10 + + Cost of Beginning inventory Net cost of purchases Cost of goods available for sale Cost of Ending inventory Cost of Ending inventory Cost of goods sold = Merchandising Operations

11 Slide 5-11 Knowledge Check : A company’s cost of goods sold was $345,000. Determine net cost of purchases and cost of ending inventory, given cost of goods available for sale were $595,000 and cost of beginning inventory was $120,000. Net Cost of PurchasesCost of Ending Inventory 1. $475,000$250,000 2. $250,000$475,000 3. $475,000$225,000 4. $250,000$225,000

12 Slide 5-12 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, net800,000 Goods available for sale900,000 Less: Ending inventory125,000 Cost of goods sold$ 775,000 Merchandising Operations Flow of Costs Periodic System

13 Slide 5-13  Seller  Invoice date  Purchaser  Order number  Credit terms  Freight terms  Goods  Invoice amount  Seller  Invoice date  Purchaser  Order number  Credit terms  Freight terms  Goods  Invoice amount        4-13

14 Slide 5-14 On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on account (terms: 2/10, n 30). Recording Purchases of Merchandise

15 Slide 5-15 FOB shipping point (buyer pays freight costs) FOB destination (seller pays freight costs) Merchandise Seller Buyer Recording Transportation Costs

16 Slide 5-16 On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 transportation costs in cash. Recording Purchase of Merchandise along with Transportation Costs

17 Slide 5-17 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchase Returns 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

18 Slide 5-18 On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier. Recording Purchase Returns of Merchandise

19 Slide 5-19 2/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due Credit Period Recording Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due. Advantages: Advantages: Purchaser saves money. Seller shortens the operating cycle. A deduction from the invoice price granted to induce early payment of the amount due. Advantages: Advantages: Purchaser saves money. Seller shortens the operating cycle.

20 Slide 5-20 Terms Purchase Discount 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

21 Slide 5-21 On February 10, the last day of the discount period, Wally Mart paid the balance due for the Feb 1 purchase. Prepare the journal entry for payment. Recording Payments, net of Returns and Discounts

22 Slide 5-22 Recording Payments without discount If Wally Mart failed to take the discount, and instead made full payment on February 15, the journal entry would be:

23 Slide 5-23 Knowledge Check: Tony Company purchased $8,500 of merchandise on September 25 on terms of 1/10, n30. On September 27, Tony returned defective merchandise worth $700, and received full credit. The invoice was paid in full on September 30. Tony’s journal entry on September 30 will include: 1. A credit to merchandise inventory for $700. 2. A debit to accounts payable for $7,800. 3. A credit to cash for $8,415 4. A credit to Merchandise Inventory for $85.

24 Slide 5-24 Two Journal Entries to Record a Sale: Cash or Accounts receivableXXX Sales XXX Recording Sales of Merchandise #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost 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.

25 Slide 5-25 On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise was carried in inventory at a cost of $700. Credit Terms were 3/10, n 30. Recording Sales of Merchandise

26 Slide 5-26 On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart. The return is related to the Feb 11 sale. Assume the goods were NOT defective. Sales Returns and Allowances is a contra revenue account. Recording Returns of Merchandise Sold

27 Slide 5-27 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 returns of Merchandise Sold

28 Slide 5-28 On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart. The return is related to the Feb 11 sale. Assume the returned goods were defective, and had a scrap value of $50. The journal entry would be: Recording Returns of Merchandise Sold

29 Slide 5-29 On February 17, Wally Mart received the net amount owed from the sale of Feb 11. Sales Discounts is a contra revenue account. Cash Receipts, net of Returns and Discounts

30 Slide 5-30 Knowledge Check: On July 26, Tyler Company makes a sale for $500 to Pauli Company. The cost of the merchandise sold was $300. On August 1, Pauli Company returned the merchandise, which is not defective, and is restored back to the inventory. What is the effect of the August 1 transaction on Total assets and Equity for Tyler Company? 1. Total assets increase $300;Equity increases $300. 2. Total assets decrease $500; Equity decreases $500. 3. Total assets decrease $200; Equity decreases $200. 4. Total assets increase $200; Equity increases $200.

31 Slide 5-31 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 Cycle

32 Slide 5-32 At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. Determine the adjusting entry for Shrinkage. At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted balance of $15,000, but a physical count shows that only $14,300 of inventory on hand. Determine the adjusting entry for Shrinkage. Adjusting Entry for Shrinkage

33 Slide 5-33 Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non- operating activities. Multiple-Step Income Statement Forms of Financial Statements

34 Slide 5-34 Income Statement Presentation of Sales Multiple-Step Income Statement

35 Slide 5-35 Illustration 5-13 Key Items: Net sales Gross profit Gross profit rate Illustration 5-10 Gross Profit Multiple-Step Income Statement

36 Slide 5-36 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses Illustration 5-13 Multiple- Step

37 Slide 5-37 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses Nonoperating activities Net income Illustration 5-13

38 Slide 5-38 Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Single-Step Income Statement Forms of Financial Statements

39 Slide 5-39 Illustration 5-14 Single- Step Forms of Financial Statements

40 Slide 5-40 Forms of Financial Statements Illustration 5-15 Classified Balance Sheet

41 Slide 5-41 End of Chapter 5


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