Accounting for Merchandising Businesses Chapter 4 T.Hend Alajaji

Objectives : Nature of Businesses . Special terms of Merchandising businesses . Analysis of merchandising transactions. Multiple-Step Income Statement

Ch4 Merchandising businesses Service businesses compute Net income Selas Revenues Cost of goods Sold Gross Profit Merchandising Inventory Analyze Merchandising transactions

:Objective 1 . Nature of Businesses Service Businesses provide services rather than products to customers. Merchandising businesses sell products they purchase from other business to customers.

Operating expenses –XXX Net income $XXX : Objective 1 . Nature of Businesses Service Business Fees earned $XXX Operating expenses –XXX Net income $XXX A service company sells its services

Merchandising Business :Objective 1 . Nature of Businesses Merchandising Business Sales $XXX Cost of Merchandise Sold –XXX Gross Profit $XXX Operating Expenses –XXX Net Income $XXX A merchandising company, the subject of this chapter, sells products to customers

Compute the net income Service business: Fees earned – operating expenses = net income Merchandise business: Sales – cost of merchandise sold = gross profit Gross profit – operating expenses = net income

Income Statement Comparison Service Business Fees earned $150,000 Operating expenses(-) 120,000 Net income $ 30,000 Merchandising Business Sales revenue $600,000 Cost of mdse. Sold - 450,000 Gross profit $150,000 Operating expenses - 120,000 Net income $ 30,000

Objective 2 . Special terms of Merchandising businesses sales revenue or sales : the amount that a business earns from selling merchandise inventory is called sales revenue, or sales. cost of merchandise sold : the major expense of a merchandiser is cost of goods sold. Gross margin or Gross profit : The excess of sales over cost of sales is called gross margin. Merchandise inventory Merchandise on hand at the end of an account period

Analyze Merchandising transactions Objective 3 Analyze Merchandising transactions

1- Sales Transactions Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system. Selling Price Part I Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system. Part II Selling price. Wal-Mart’s sales price is recorded as an increase in Sales Revenue and a corresponding increase in either Cash (for a cash sale) or Accounts Receivable (for a credit sale). Part III Cost. The cost that Wal-Mart incurred to initially buy the merchandise is removed from Inventory and reported as an expense called Cost of Goods Sold (CGS). Cost 6-12

1- Sales Transactions On January 3, NetSolutions sold $1,800 of merchandise for cash. Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200 Date Description Debit Credit Jan. 3 Cash Sales 1,800 Cost of merchandise sold Merchandise inventory 1,200

1- Sales Transactions On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280. Date Description Debit Credit Jan. 12 Account receivable Sales 510 Cost of merchandise sold Merchandise inventory 280

2- Sales Returns and Allowances When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance. When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance. These sales returns and allowances require Wal-Mart to revise the previously recorded sale and, in the case of returns, to revise the previously recorded inventory reduction and cost of goods sold.

2- Sales Returns and Allowances On January 13, issued Credit Memo No. 32 to Alsaud Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140. Date Description Debit Credit Jan. 13 Sales returns and allowances Account receivable – Krier Co. 225 Merchandise inventory Cost of merchandise sold 140

3- Sales on Account and Sales Discounts A sales discount is a sales price reduction given to customers for prompt payment of their account balance. When a merchandiser makes a sale on account, it gives up its inventory but receives only a promise of being paid cash later. To encourage customers to make these payments promptly, a merchandiser often specifies payment terms such as “2/10, n/30.” The “2/10” means that if the customer pays within 10 days of the sale date, a 2 percent sales discount will be deducted from the selling price. The “n/30” part means that if payment is not made within the 10-day discount period, the full amount will be due 30 days after the date of sale.

3- Sales on Account and Sales Discounts To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount Date Description Debit Credit Jan. 22 Cash Sales discounts Account receivable 1,470 30 1,500

Summary of Sales-Related Transactions The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts. The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts. This slide summarizes their effects on sales reporting. The documentation procedure involving contra-revenue accounts allows managers to monitor and control how sales discounts, returns, and allowances affect the company’s revenues. For example, frequent returns of defective products would show up as an increase in the Sales Returns and Allowances account. In response to such an increase, Wal-Mart’s managers might decide to discontinue the product or find a new supplier. Detailed information relating to sales discounts and returns is a key part of a merchandiser’s business operations. To avoid revealing these secrets to competitors, most companies report these contra-accounts only on their internal financial statements. Externally reported income statements almost never include contra-revenue accounts. Instead, externally reported income statements begin with Net Sales.

Purchase Transactions On January 3, NetSolutions purchased merchandise for cash. On January 4, NetSolutions purchased merchandise on account from Thomas Corporation Date Description Debit Credit Jan. 3 Merchandise inventory Cash 2,510 Jan. 4 Account payable - Thomas Corporation 9,250

2- Purchases Discounts : Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period. Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22. Date Description Debit Credit Mar. 12 Merchandise inventory Account payable - Alpha Technologies 3,000 Mar. 22 Cash 2,940 60

3- Purchases Returns and Allowances : NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. NetSolutions records the return of the merchandise as follows: Date Description Debit Credit Mar. 7 Account payable - Maxim Systems Merchandise inventory 900

Multiple-Step Income Statement

NetSolutions Income Statement For the Year Ended December 31, 2007 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 sold 525,305 Gross profit $182,950 Continued

Operating expenses: Selling expenses: Sales salaries expense $56,230 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240 Continued

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

M6-11 Calculating Shrinkage in a Perpetual Inventory System Corey’s Campus Store has $50,000 of inventory on hand at the beginning of the month. During the month, the company buys $8,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $25,000 of inventory is on hand. How much shrinkage occurred during the month? Part I M6-11 Calculating Shrinkage in a Perpetual Inventory System Corey’s Campus Store has $50,000 of inventory on hand at the beginning of the month. During the month, the company buys $8,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $25,000 of inventory is on hand. How much shrinkage occurred during the month? Part II The shrinkage for the month is $3,000 and is calculated as shown on this slide. 6-27