1. Accounting for Merchandising Activities Accounting for Merchandising Activities C H A P T E R 5 Part 1

2. Learning Objectives 1. Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO 1 ) 2. Describe both periodic and perpetual merchandise inventory systems. (LO 2 ) 3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO 3 ) 6-2

3. Learning Objectives 4. Prepare adjustments for a merchandising company. (LO 4 ) 5. Define, prepare, and use merchandising income statements. ( LO 5 ) 6. Prepare closing entries for a merchandising company. ( LO 6 ) 6-3

4. Learning Objectives 7. Record and compare merchandising transactions using both periodic and perpetual inventory systems. (Appendix 5A) ( LO 7 ) 8. Explain and record Provincial Sales Tax (PST), Goods and Services Tax (GST) and Harmonized Sales Tax (HST). (Appendix 5B) ( LO 8 ) 6-4

5. Merchandising Activities Merchandiser: A company that earns net income by buying and selling merchandise. Wholesaler: A company that buys products from manufacturers or other wholesalers and sells them to retailers or other wholesalers. 6-5 LO 1

6. Inventory 6-6 Products a company owns for the purpose of selling to customers. It is often referred to as Merchandise Inventory. Is classified as a current asset. LO 1

7. Merchandise inventory is: A)Reported on the balance sheet under plant and equipment. B)Products a company owns for resale to customers. C)Reported on the income statement as an expense. D)Includes supplies. E)Included on a service company's balance sheet.

8. Net Sales Cost of Goods Sold Gross Profit Operating Expenses Net Income Operating Expenses Revenues MerchandiserService Company Computing Net Income 6-8 LO 1

9. Cost of the goods But also: Shipping costs (Freight In) Any other costs required to make goods ready for sale Cost of Inventory? 6-9 LO 1

10. Merchandising Cost Flow 6-10 Beginning Merchandise Inventory Merchandise available for sale Ending Merchandise inventory Cost of goods sold Net cost of Purchases LO 1

11. Practice Exercise 5-1 6-11 Flashcards

12. Perpetual Provides a continuous record of: The amount of inventory on hand Cost of goods sold to date Periodic Requires a physical count of goods to determine: The amount of merchandise inventory on hand Cost of goods sold Merchandise Inventory Systems 6-12 LO 2

13. Perpetual System – Example 6-13 Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200 Purchased merchandise inv. on account Nov.5 Accounts Payable 300 Merchandise Inventory 300 Purchase return re: debit memo Purchases Purchase Returns and Allowances LO 3 Merchandise Inventory 1,200 300 900 Accounts Payable 1,200 300 900

14. Terms Time Due Discount Period = 10 days (Full amount minus 2% discount) due between Nov.2 and Nov.12 Credit Period = 30 days Full amount due anytime between Nov.13 and Dec.2 Purchase or Sale Nov.2 Nov.12Dec.2 Prompt Payment Discounts 6-14 LO 3 A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30

15. Perpetual System–Example 6-15 Purchase Discounts- Assume the purchase on November 2 was on the terms 2/10,n30. Case 1-Discount taken How much will we have to pay? LO 3 Accounts Payable 1,200 300 900

16. Perpetual System–Example 6-16 Purchase Discounts- Assume the purchase on November 2 was on the terms 2/10,n30. Now being paid on November 12. Case 1-Discount taken Nov.12 Accounts Payable 900 Cash 882 Merchandise Inventory 18 2% x (1,200 - 300) = 18 Case 2-Discount not taken Nov.12 Accounts Payable 900 Cash 900 LO 3 Accounts Payable 1,200 300 900 900 Practice: QS 5-5

17. Z-Mart uses the perpetual inventory system and recorded the following journal entry: The transaction was: A)A purchase B)A return C)A return and payment of the account payable. D)A payment of the account payable and recognition of a cash discount taken E)A purchase and recognition of a cash discount taken Accounts Payable Merchandise Inventory Cash 2,500 50 2,450

18. Perpetual System–Example Transportation 6-18 Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise. LO 3 Us Our Customer Our Supplier $75

19. FOB “Shipping Point” (Buyer pays shipping charges) FOB “Destination” (Seller pays for shipping charges) Goods Seller Buyer Carrier (shipping company) Transportation Charges: Who Pays? 6-19 LO 3

20. This entry: Is a/an: A)Adjusting entry B)Reversing entry C)Closing entry D)Regular journal entry E)Cannot be determined Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise.

21. Perpetual System–Example 6-21 Nov.12 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on terms 2/10,n60 Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold LO 3 Merchandise Inventory 1,200 300 900 600 Sale of Merchandise

22. Perpetual System–Example Customer Payment Case 1-Customer pays in 60 days Case 2-Customer pays in 10 days 6-22 Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale LO 3 Nov.22 Cash 980 Sales discounts 20 Accounts receivable 1,000 Received payment less the discount

23. Perpetual System–Example Sales Returns and Allowances 6-23 Nov.6 Sales Returns & Allowance 800 Accounts Receivable 800 Customer returned merchandise Merchandise Inventory 600 Cost of Goods Sold 600 Returned goods to merchandise inventory LO 3 Practice: QS 5-8