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Chapter 6 Accounting for Merchandising Businesses Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus.

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Presentation on theme: "Chapter 6 Accounting for Merchandising Businesses Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus."— Presentation transcript:

1 Chapter 6 Accounting for Merchandising Businesses Accounting, 21 st Edition Warren Reeve Fess PowerPoint Presentation by Douglas Cloud Professor Emeritus of Accounting Pepperdine University © Copyright 2004 South-Western, a division of Thomson Learning. All rights reserved. Task Force Image Gallery clip art included in this electronic presentation is used with the permission of NVTech Inc.

2 Some of the action has been automated, so click the mouse when you see this lightning bolt in the lower right-hand corner of the screen. You can point and click anywhere on the screen.

3 1.Distinguish the 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. ObjectivesObjectives After studying this chapter, you should be able to:

4 5.Describe the accounting for transportation costs, sales taxes, and trade discounts. 6.Illustrate the dual nature of merchandising transactions. 7.Prepare a chart of accounts for a merchandising business. 8.Describe the accounting cycle for a merchandising business. 9.Compute the ratio of net sales to assets as a measure of how effectively a business is using its assets. ObjectivesObjectives

5 Service Business Fees earned$XXX Operating expenses–XXX Net income$XXX Nature of Businesses

6 Merchandising Business Sales$XXX Cost of Merchandise Sold–XXX Gross Profit$XXX Operating Expenses–XXX Net Income$XXX Nature of Businesses

7 Multiple-Step Income Statement

8 Revenue from sales: Sales$720,185 Less:Sales returns and allowances$ 6,140 Sales discounts 5,790 11,930 Net sales$708,255 Cost of merchandise sold525,305 Gross profit$182,950 NetSolutions Income Statement For the Year Ended December 31, 2007 Continued

9 Operating expenses: Selling expenses: Sales salaries expense$56,230 Advertising expense10,860 Depr. Expense–store equipment3,100 Miscellaneous selling expense 630 Total selling expenses$ 70,820 Administrative expenses: Office salaries expense$21,020 Rent expense8,100 Depr. expense–office equipment2,490 Insurance expense1,910 Office supplies expense610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations$ 77,240 Continued

10 Other income and expenses: Rent revenue$ 600 Interest expense(2,440) (1,840) Net income $75,400 Concluded

11 Periodic vs. Perpetual Methods of Accounting Periodic Method A method of determining the cost of merchandise sold and the amount of merchandise on hand Under this method, the inventory records do not show the amount available for sale or the amount sold during the period

12 Under this method, each purchase and sale of merchandise is recorded in the inventory and the cost of merchandise sold accounts. The amount of merchandise available for sale and the amount sold are continuously disclosed in the inventory records. Periodic vs. Perpetual Methods of Accounting Perpetual Method

13 Cost of Merchandise Purchased Purchases$521,980 Less:Purchase returns and allowances$9,100 Purchase discounts 2,525 11,625 Net purchases$510,355 Add transportation-in 17,400 Cost of merchandise purchased$527,755

14 Cost of Merchandise Sold Merchandise inventory, 1/1/07$ 59,700 Purchases$521,980 Less: Purchase returns and allowances$9,100 Purchase 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, 12/31/07 62,150 Cost of merchandise sold$525,305

15 Single-Step Income Statement for a Merchandising Business

16 Revenues: Net sales$708,255 Rent revenue 600 Total revenues$708,855 Expenses: Cost of merchandise sold$525,305 Selling expenses70,820 Administrative expenses34,890 Interest expense 2,440 Total expenses 633,455 Net income$ 75,400 NetSolutions Income Statement For the Year Ended December 31, 2007

17 Statement of Owner’s Equity for a Merchandising Business

18 Chris Clark, capital, 1/1/07$153,800 Net income for year$75,400 Less withdrawals18,000 Increase in owner’s equity 57,400 Chris Clark, capital, 12/31/07$211,200 NetSolutions Statement of Owner’s Equity For the Year Ended December 31, 2007

19 Balance Sheet

20 Assets Current assets: Cash$52,950 Accounts receivable91,080 Merchandise inventory62,150 Office supplies480 Prepaid insurance 2,650 Total current assets$209,310 NetSolutions Balance Sheet December 31, 2007 Continued

21 Property, plant, and equipment: Land$20,000 Store equipment$27,100 Less accumulated depreciation 5,70021,400 Office equipment$15,570 Less accumulated depreciation 4,72010,850 Total property, plant, and equipment 52,250 Total assets$261,560 Continued

22 Liabilities Current liabilities: Accounts payable$22,420 Note payable (current portion)5,000 Salaries payable1,140 Unearned rent 1,800 Total current liabilities$ 30,360 Long-term liabilities: Note payable (due 2017) 20,000 Total liabilities$ 50,360 Owner’s Equity Chris Clark, capital 211,200 Total liabilities and owner’s equity$261,560 Liabilities Current liabilities: Accounts payable$22,420 Note payable (current portion)5,000 Salaries payable1,140 Unearned rent 1,800 Total current liabilities$ 30,360 Long-term liabilities: Note payable (due 2017) 20,000 Total liabilities$ 50,360 Owner’s Equity Chris Clark, capital 211,200 Total liabilities and owner’s equity$261,560 Concluded

23 Sales Transactions

24 JOURNAL Date Description Post. Ref. Dr Cr PAGE 26 5 Jan. 3Cash Sales To record cash sales. On January 3, a firm sold $1,800 of merchandise for cash. Cash Sales

25 Using a perpetual inventory, the inventory cost of $1,200 must be recorded Cost of Merchandise Sold Merchandise Inventory To record the cost of merchandise sold. 10

26 Credit card sales (MasterCard or Visa) are recorded as cash sales. At the end of the month, $48 was sent to cover this service charge. JOURNAL Date Description Post. Ref. Dr Cr PAGE 28 5 Cash Jan. 31Credit Card Expense Cash Sales To record service charges on credit card sales for the month.

27 Jan. 12Accounts Receivable—Sims Co Invoice No Sales Cost of Merchandise Sold Merchandise Inventory Cost of merchandise sold on Invoice No Sales on Account On January 12, a firm sold Sims Company merchandise on account, $510. The cost of the merchandise to the seller was $280.

28 Sales Discounts The terms for when payments for merchandise are to be made are called credit terms. If buyer is allowed an amount of time to pay, it is known as the credit period.

29 If invoice is paid within 10 days of invoice date Sales Discounts Credit Terms Invoice for $1,500 Terms: 2/10, n/30 $1,470 paid (less 2% as a cash discount)

30 If invoice is NOT paid within 10 days of invoice date Sales Discounts Credit Terms Invoice for $1,500 Terms: 2/10, n/30 $1,500 PAID

31 Sales Discounts On January 21, the firm receives the amount due from Sims (refer to Slide 25), less the 2 percent discount. Jan. 21Cash Accounts Receivable—Sims Co Sales Discounts Collection of Invoice No. 7172, less discount.

32 Sales Returns and Allowances Merchandise that is returned to the vendor is referred to as a sales return. If there is a defect in the product or the wrong item was shipped, the seller may reduce the initial price at which the goods were sold. This is known as a sales allowance.

33 Jan. 13Sales Returns and Allowances Credit Memo No. 32. Accounts Receivable—Krier Co Merchandise Inventory Cost of Merchandise Sold Cost of merchandise returned—Credit Memo 32. Sales Returns and Allowances On January 13, issued Credit Memo 32 to Krier Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.

34 Purchase Transactions

35 Date Description Post. Ref. Dr Cr Jan. 3Merchandise Inventory Cash Purchased inventory from Bowen Co. Purchase Transactions On January 3, Purchased merchandise for cash from Bowen Company, $2,510.

36 What’s the last day the invoice can be paid? Purchase Discounts Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30.

37 Invoice period30 Days in March31 Date of invoice12 Remaining days19 April 11 Let’s do a simple calculation. The full amount is due on April 11. Purchase Discounts

38 We can borrow at an annual interest rate of 6%. Should we borrow to pay the invoice within the discount period? Purchase Discounts $60 discount (2% x $3,000)?

39 Discount$60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing$50.20 Let’s see… Interest on the amount due of $3,000 less the 2 percent… Purchase Discounts

40 Looks like we should take advantage of the discount even if we have to borrow the money. Purchase Discounts Discount$60.00 Interest for 20 days at the rate of 6% on $2,940 –9.80 Savings from borrowing$50.20

41 JOURNAL Date Description Post. Ref. Dr Cr PAGE 27 5 On March 12, NetSolutions purchased merchandise on account from Alpha Technologies, $3,000. Mar. 12Merchandise Inventory Accounts Payable—Alpha Technologies Purchase Discounts

42 JOURNAL Date Description Post. Ref. Dr Cr PAGE 27 5 If payment is made by March 22 NetSolutions records the discount as a reduction in cost. Mar. 22Accounts Payable—Alpha Technol Cash Merchandise Inventory Purchase Discounts

43 JOURNAL Date Description Post. Ref. Dr Cr PAGE 27 5 If NetSolutions does not pay the invoice until April 11, it would pay the full amount. Apr. 11Accounts Payable—Alpha Technol Cash Purchase Discounts

44 Purchases Returns and Allowances A purchases return involves actually returning merchandise that is damaged or does not meet the specifications of the order. When the defective or incorrect merchandise is kept by the buyer and the vendor makes a price adjustment, this is a purchases allowance.

45 NetSolutions received the delivery from Maxim Systems and determined that $900 of the items were not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. Purchases Returns and Allowances You sent me the wrong interface cards. We’ll send a debit memorandum with the returned items.

46 Mar. 7Accounts Payable—Maxim Systems Debit Memo No. 18 Merchandise Inventory Purchases Returns and Allowances

47 On May 2, NetSolutions purchased $5,000 of merchandise from Delta Data Link, subject to terms 2/10, n/30. May 2Merchandise Inventory Purchased merchandise. Accounts Payable—Delta Data

48 Purchases Returns and Allowances On May 4, NetSolutions returns $3,000 of the merchandise. May 4Accounts Payable—Delta Data Links Returned portion of merchandise purchased. Merchandise Inventory

49 Purchases Returns and Allowances On May 12, NetSolutions pays the amount due. May 12Accounts Payable—Delta Data Links Paid invoice. Cash Merchandise Inventory ($5,000 – $3,000) x 2%

50 Transportation Costs

51 FOB Shipping Point Buyer pays freight costs and debits Merchandise Inventory Fruit Express Title passes to buyer as shipment leaves shipping point.

52 June 10 Merchandise Inventory Purchased merchandise, terms FOB shipping point. Accounts Payable—Magna Data Merchandise Inventory Cash Paid shipping cost. On June 10, NetSolutions buys merchandise from Magna Data on account, $900, terms FOB shipping point and pays the transportation cost of $50. FOB Shipping Point

53 FOB Destination Title passes to buyer upon arrival at destination. Seller pays freight costs and debits Transportation Out Fruit Express

54 On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40. FOB Destination June 15 Accounts Receivable—Kranz Co Sold merchandise, terms FOB destination. Sales Cost of Merchandise Sold Merchandise Inventory Cost of sale of Kranz Co.

55 FOB Destination June 15 Transportation Out Cash Paid shipping cost on merchandise sold. On June 15, NetSolutions sells merchandise to Kranz Company on account, $700, terms FOB destination. The cost of the merchandise sold is $480. NetSolutions pays the transportation cost of $40.

56 Sales Taxes On August 12, merchandise is sold on account to Lemon Company, $100. The state has a 6% sales tax. Aug. 12 Accounts Receivable—Lemon Co Sales Sales Taxes Payable6 00 Invoice No. 339

57 Sales Taxes On September 15, the seller sends in a payment of $2,900 to the taxing unit for the August taxes collected. Sept.15 Sales Tax Payable Cash Payment for sales taxes collected during August.

58 Illustration of Accounting for Merchandise Transactions July 1. Scully Company sold merchandise on account to Burton Co., $7,500, terms FOB shipping point, n/45. The cost of the merchandise sold was $4,500. Scully Company (Seller) Accounts Receivable—Burton Co.7,500 Sales7,500 Cost of Merchandise Sold4,500 Merchandise Inventory4,500 Burton Company (Buyer) Merchandise Inventory.7,500 Accounts Payable—Scully Co.7,500

59 Illustration of Accounting for Merchandise Transactions Scully Company (Seller) No entry. Burton Company (Buyer) Merchandise Inventory150 Cash150 July 2. Burton Company paid transportation charges of $150 on July 1 purchase from Scully Company.

60 Illustration of Accounting for Merchandise Transactions July 5. Scully Company sold merchandise on account to Burton Co., $5,000, terms FOB shipping point, n/30. The cost of the merchandise sold was $3,500. Scully Company (Seller) Accounts Receivable—Burton Co.5,000 Sales5,000 Cost of Merchandise Sold3,500 Merchandise Inventory3,500 Burton Company (Buyer) Merchandise Inventory.5,000 Accounts Payable—Scully Co.5,000

61 Illustration of Accounting for Merchandise Transactions July 7. Scully Company paid transportation costs of $ 250 for delivery of merchandise sold to Burton Company on July 5. Scully Company (Seller) Transportation Out250 Cash250 Burton Company (Buyer) No entry.

62 Illustration of Accounting for Merchandise Transactions July 13. Scully Company issued Burton Company a credit memorandum for $1,000 of merchandise returned from a July 5 purchase on account. The cost of the merchandise was $700. Scully Company (Seller) Sales Returns and Allowances1,000 Accounts Receivable—Burton Co.1,000 Merchandise Inventory700 Cost of Merchandise Sold700 Burton Company (Buyer) Accounts Payable—Scully Co.1,000 Merchandise Inventory1,000

63 Illustration of Accounting for Merchandise Transactions July 15. Scully Company received payment from Burton Company for purchase of July 5. Scully Company (Seller) Cash4,000 Accounts Receivable—Burton Co.4,000 Burton Company (Buyer) Accounts Payable—Scully Co.4,000 Cash4,000

64 Illustration of Accounting for Merchandise Transactions July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. Scully Company (Seller) Accounts Receivable—Burton Co.12,000 Sales12,000 Accounts Receivable—Burton Co.500 Cash500 Burton Company (Buyer) Merchandise Inventory12,500 Accounts Payable—Scully Co.12,500

65 Illustration of Accounting for Merchandise Transactions July 18. Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom. Scully prepaid transportation costs of $500, which were added to the invoice. The cost of the merchandise sold was $7,200. Continued (Seller) Cost of Merchandise Sold7,200 Merchandise Inventory7,200 Burton Company (Buyer)

66 Illustration of Accounting for Merchandise Transactions July 28. Scully Company received payment from Burton Company for purchase of July 18, less discount (2% x $12,000). Scully Company (Seller) Cash12,260 Sales Discounts240 Accounts Receivable—Burton Co.12,500 Burton Company (Buyer) Accounts Payable—Scully Co.12,500 Merchandise Inventory240 Cash12,260

67 Balance Sheet Accounts 200 Liabilities 210Accounts Payable 211Salaries Payable 212Unearned Rent 215Notes Payable 300 Owner’s Equity 310Chris Clark, Capital 311Chris Clark, Drawing 312Income Summary 100 Assets 110Cash 112Accounts Receivable 115Merchandise Inventory 116Office Supplies 117Prepaid Insurance 120Land 123Store Equipment 124Accumulated Depreciation— Store Equipment 125Office Equipment 126Accumulated Depreciation— Office Equipment NetSolutions Chart of Accounts

68 Income Statement Accounts 600 Other Income 610Rent Revenue 700 Other Expense 710Interest Expense 400 Revenues 410Sales 411Sales Returns and Allowances 412Sales Discounts 500 Costs and Expenses 510Cost of Merchandise Sold 520Sales Salaries Expense 521Advertising Expense 522Depreciation Expense— Store Equipment 523 Transportation Out 529Miscellaneous Selling Expense 530Office Salaries Expense 531Rent Expense 532Depreciation Expense— Office Equipment 533Insurance Expense 534Office Supplies Expense 539Miscellaneous Admin. Expense NetSolutions Chart of Accounts

69 Merchandise Inventory Shrinkage NetSolutions inventory records indicate that $63,950 of merchandise should be available for sale on December 31, The physical count reveals that only $62,150 is actually available.

70 Merchandise Inventory Shrinkage Dec. 31Cost of Merchandise Sold Merchandise Inventory Adjusting Entry Inventory records$63,950 Inventory count 62,150 Inventory shortage$ 1,800

71 Profitability Measures -- Effective Use of Assets Ratio of Net Sales to Assets SearsPenney Net sales$41,366,000$31,846,000 Total assets: Beginning of year$50,409,000$19,742,000 End of year $44,317,000$20,908,000 Average$47,363,000$20,325,000 Ratio of net sales to assets.87 to to 1 Ratio Use:To assess the effectiveness in the use of assets to generate sales.

72 The End Chapter 6


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