Chapter Four Accounting for Merchandising Businesses McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Merchandising Businesses Sale Merchandising businesses generate revenue by selling goods. The goods purchased for resale are called merchandise inventory. 4-1

Product Costs Versus Selling and Administrative Costs Product Costs Costs that are included in inventory. Selling & Admin. Costs Costs that are not included in inventory. They are sometimes called period costs. 4-2

Allocation of Inventory Cost Between Asset and Expense Accounts Cost of Goods Available for Sale Merchandise Inventory (Balance Sheet) Cost of Goods Sold (Income Statement) 4-3

Gross Margin (or Gross Profit) 4-4

Perpetual Inventory System Inventory account is adjusted perpetually (continually) throughout the accounting period. 4-5

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A deduction from the invoice price granted to induce early payment of the amount due. Terms Time Due Discount Period Full amount less discount Credit Period Full amount due Purchase or Sale Cash Discounts 4-8

2/10, n/30 Percentage of Discount # of Days Discount Is Available Otherwise, the Full Amount Is Due # of Days when Full Amount Is Due Cash Discounts 4-9

Transportation Costs FOB shipping point (buyer pays) FOB destination (seller pays) Merchandise SellerBuyer FOB = Free on Board 4-10

Gains and Losses Sales Price of Land - Cost of Land Gain or Loss Gross margin Sales Revenue -Cost of Goods Sold Gross Margin 4-11

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Lost, Damaged, or Stolen Inventory Most merchandise companies experience some level of inventory shrinkage, a term that reflects decreases in inventory for reasons other than sales to customers. 4-13

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Gross Margin Percentage Gross Margin Net Sales This measure indicates how much of each sales dollar is left after deducting the cost of goods sold to cover expenses and provide a profit. Other things being equal, the company with the higher gross margin percentage is pricing its products higher. 4-15

Return on Sales Net Income Net Sales Net income expressed as a percentage of sales provides insight as to how much of each sales dollar is left as net income after all expenses are paid. Other things being equal, the company with the higher return on sales percentage is doing a better job of controlling costs. 4-16

Periodic Inventory System (Appendix) A practical alternative for recording inventory in a low-technology, high-volume environment Cost of inventory is recorded in a Purchases account Ending inventory and cost of goods sold are determined by year-end physical count 4-17

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Periodic Inventory System (Appendix) 4-19

End of Chapter Four 4-20