1. Slide 5-1

2. Slide 5-2 Chapter 5 Accounting for Merchandising Operations Financial Accounting, IFRS Edition Weygandt Kimmel Kieso

3. Slide 5-3 1. 1.Identify the differences between service and merchandising companies. 2. 2.Explain the recording of purchases under a perpetual inventory system. 3. 3.Explain the recording of sales revenues under a perpetual inventory system. 4. 4.Explain the steps in the accounting cycle for a merchandising company. 5. 5.Prepare an income statement for a merchandiser. 6. 6.Explain the computation and importance of gross profit. Study Objectives

4. Slide 5-4 Forms of Financial Statements Accounting for Merchandising Operations Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions MerchandisingOperationsMerchandisingOperations Recording Purchases of Merchandise Recording Sales of Merchandise Completing the Accounting Cycle Operating cycles Flow of costs— perpetual and periodic inventory systems Sales returns and allowances Sales discounts Adjusting entries Closing entries Summary of merchandising entries Income statement Classified statement of financial position

5. Slide 5-5 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.

6. Slide 5-6 Merchandising Operations Income 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 = = Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses SO 1 Identify the differences between service and merchandising companies.

7. Slide 5-7 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. Merchandising Operations Operating Cycle

8. Slide 5-8 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs Illustration 5-3

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. SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs

10. Slide 5-10 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 sale900,000 Less: Ending inventory- 125,000 Cost of goods sold$ 775,000 SO 1 Identify the differences between service and merchandising companies. Merchandising Operations Flow of Costs Periodic System

11. Slide 5-11 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

12. Slide 5-12 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 would make to record its purchase from PW Audio Supply. Merchandise inventory3,800May 4 Accounts payable 3,800 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

13. Slide 5-13 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 – Terms of Sale Freight Costs – Terms of Sale Freight costs incurred by the seller are an operating expense. SO 2

14. Slide 5-14 Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company €1 50 for freight charges, the entry on Sauk Stereo’s books is: Merchandise inventory150May 6 Cash 150 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: Freight-out (or Delivery Expense)150May 4 Cash 150

15. Slide 5-15 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.

16. Slide 5-16 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. Answer on notes page 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

17. Slide 5-17 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. Accounts payable300May 8 Merchandise inventory 300

18. Slide 5-18 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. SO 2 Explain the recording of purchases under a perpetual inventory system.

19. Slide 5-19 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 SO 2 Explain the recording of purchases under a perpetual inventory system.

20. Slide 5-20 Merchandise Inventory 70 Accounts payable3,500May 14 Recording Purchases of Merchandise 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. Cash 3,430

21. Slide 5-21 Accounts payable3,500June 3 Recording Purchases of Merchandise Cash 3,500 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:

22. Slide 5-22 Should discounts be taken when offered? Purchase Discounts Recording Purchases of Merchandise Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 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.

23. Slide 5-23 € 3,800 8 th - Return € 300 Balance 4 th - Purchase 3,580 € 3,580 7014 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.

24. Slide 5-24 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

25. Slide 5-25 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

26. Slide 5-26 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Accounts receivable3,800May 4 Sales 3,800 Illustration: Assume PW Audio Supply 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 sold2,4004 Merchandise inventory 2,400

27. Slide 5-27 “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.

28. Slide 5-28 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. Sales returns and allowances 300May 8 Accounts receivable300 Merchandise inventory 1408 Cost of goods sold140

29. Slide 5-29 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 Merchandise inventory 508 Cost of goods sold50

30. Slide 5-30 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. Answer on notes page 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.

31. Slide 5-31 Answers on notes page

32. Slide 5-32 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.

33. Slide 5-33 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Cash3,430May 14 Accounts receivable3,500 Sales discounts70 * [(€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.

34. Slide 5-34 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 SO 4 Explain the steps in the accounting cycle for a merchandising company.

35. Slide 5-35 Completing the Accounting Cycle 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

36. Slide 5-36 Completing the Accounting Cycle Closing Entries