1. BAF3M Accounting Chapter 11 – Accounting for a Merchandising Business

2. Merchandising Video

3. So far, we’ve only studied service businesses, now we move on to merchandising businesses –Major difference is inventory “stuff to sell” –Two major categories Wholesaler – buys from manufacturers and sells to retailers Retailers – buys from wholesalers and sells to final consumers

4. 10.1 The Merchandising Business Merchandise is the name given to items bought by a business in order to be sold to consumers Two aspects … Merchandise inventory is either SOLD or NOT SOLD … the SOLD amount is reflected in the COST OF GOODS SOLD (COGS) section of the I/S; and the NOT SOLD amount is still reflected as a current asset on the B/S

5. 10.1 The Merchandising Business There are two Inventory Systems used in accounting PERIODIC PERPETUAL We will be learning about the PERIODIC system

6. 10.1 The Merchandising Business The goal is to sell inventory quickly thus inventory moves in and out of the business frequently SO… 1)There is inventory to begin the accounting period with. 2)Merchandise is sold and moves out throughout the inventory period. 3)Merchandise is replaced by the purchase of new stock from time to time. 4)The ending inventory should be more or less the same as the beginning inventory. INVENTORY CYCLE

7. 10.1 The Merchandising Business Cost of Goods Sold Formula = Cost of Beg. Inv (what we started with) + Cost of Merch Purchases (what we added during the period) (these first two give us the ‘Cost of Goods Available for Sale’ aka “CGAS”) - Cost of Ending inventory (what we have left over at period end) = Cost of Merch sold (what we have sold)

8. Merchandise Inventory on the Balance Sheet

9. Cost of Goods Sold on the Income Statement

10. About that Income Statement … Did ya notice …. 1)The COGS value is considered to be so significant that the statement is prepared in 2 stages. 2)The first stage determines the gross profit. Gross profit is the difference between the selling price and the cost price of the goods sold. It can also been seen as the profit figure before deducting expenses. 3)The COGS calculation is shown on the income statement. 4)The expense section is now called OPERATING EXPENSES.

11. Gross Profit Percentages Gross Profit and COGS added together will always equal the Sales figure. COGS/Sales or GP/Sales will give the %ages which will always add up to 100%. See page 400. Markup – the amount that a business increases the cost of a good to arrive at a selling price. (a 100% markup is doubling the price, ie you pay $10 for an item and sell it for $20)

12. 10.1 The Merchandising Business Page 401 –Questions: #2, 3, 8, 9, 13, 14 –Exercises 1, 2, 3, 4, 5

13. The Work Sheet for a Merchandising Business Page 408 Updating the Inventory account …

16. CLOSING ENTRIES FOR A MERCHANDISING COMPANY The process is the exact same as in a service company The steps go: 1)Close revenue/sales to income summary 2)Close expenses to income summary 3)Close income summary to capital 4)Close drawings to capital The process neatly cancels out the old inventory figure and sets up the new one, so that you will have the correct opening balances

17. SOME NEW TERMS PURCHASE RETURNS & ALLOWANCES – used to record the value of merchandise returned (damaged goods, mistaken deliveries, etc.) to the supplier PURCHASE DISCOUNTS – used to record discounts given for early payment SALES DISCOUNTS – the seller may give discounts to credit customers if they pay within a specified time period

18. FREIGHT IN VS. DELIVERY EXPENSE FREIGHT IN - the cost incurred to ship the merchandise to the store or warehouse DELIVERY EXPENSE – this account is used to record the cost of shipping the sold merchandise to the customer

19. JOURNAL ENTRIES The merchandise purchased during the fiscal period is collected in the Purchases account. This account is found in the expense section of the ledger. HMV purchased 600 DVD’s for resale at a cost of $10 per.

20. JOURNAL ENTRIES If a customer returns a good because it is damaged, not what they expected etc. The entry is as follows. A customer returned 20 DVDs to HMV that were purchased for $20 each.