5 Accounting for Merchandising Activities CHAPTER PowerPoint Slides to accompany Fundamental Accounting Principles, 14ce Prepared by Joe Pidutti, Durham College © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Learning Objectives Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO1) Describe both periodic and perpetual merchandise inventory systems. (LO2) Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3) © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Learning Objectives Prepare adjustments for a merchandising company. (LO4) Define, prepare, and use merchandising income statements. (LO5) Prepare closing entries for a merchandising company. (LO6) © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Learning Objectives Record and compare merchandising transactions using both periodic and perpetual inventory systems. (Appendix 5A) (LO7) Explain and record Provincial Sales Tax (PST) and Goods and Services Tax (GST). (Appendix 5B) (LO8) © 2013 McGraw-Hill Ryerson Limited.

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. LO 1 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Computing Net Income Merchandiser Service Company Net Sales Revenues Cost of Goods Sold Gross Profit Operating Expenses Operating Expenses Net Income Net Income LO 1 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Inventory 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 © 2013 McGraw-Hill Ryerson Limited.

Merchandise Inventory Cost of merchandise inventory includes: Costs incurred to purchase the goods. Shipping costs. Other costs required to make goods ready for sale. LO 1 © 2013 McGraw-Hill Ryerson Limited.

Merchandising Cost Flow Beginning Merchandise Inventory Net cost of Purchases Merchandise available for sale Ending Merchandise inventory Cost of goods sold LO 1 © 2013 McGraw-Hill Ryerson Limited.

Merchandise Inventory Systems Perpetual Provides a continuous record of: The amount of merchandise inventory on hand. Cost of goods sold to date. Periodic Requires a physical count of goods to determine: Cost of goods sold. LO 2 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System-Example Purchases Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200 Purchased merchandise inv. on account Purchase Returns and Allowances Nov.5 Accounts Payable 300 Merchandise Inventory 300 Purchase allowance re: debit memo LO 3 © 2013 McGraw-Hill Ryerson Limited.

Purchase/Sales Discounts A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30 Terms Time Due Credit Period = 30 days Discount Period = 10 days Nov.2 Nov.12 Dec.2 (Full amount minus 2% discount) due between Nov.2 and Nov.12 Full amount due anytime between Nov.13 and Dec.2 Purchase or Sale LO 3 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30. Case 1-Discount taken Nov.12 Accounts Payable 900 Merchandise Inventory 18 Cash 882 2% x (1,200 - 300) = 18 Case 2-Discount not taken Nov.12 Accounts Payable 900 Cash 900 LO 3 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Mini-Quiz Prepare journal entries for each of the following transactions. Assume a perpetual merchandise inventory system. October 6: Purchased 650 units of merchandise inventory at $5 per unit. The seller offered a cash discount of 2/10, n/30. October 8: Returned 25 defective units and received full credit. October 10:Paid the amount in full, less the returned items. LO 3 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Mini-Quiz Oct.6 Merchandise Inventory 3,250 A/P 3,250 (650 x 5) 8 A/P 125 Merchandise Inventory 125 (25 x 5) 11 A/P 3,125 Merchandise Inventory 62.50 Cash 3,062.50 (3,250-125) x 2% LO 3 © 2013 McGraw-Hill Ryerson Limited.

(Buyer pays shipping charges) (Seller pays for shipping charges) Transportation Charges – Perpetual System Seller Buyer Goods FOB Shipping Point (Buyer pays shipping charges) Carrier FOB Destination (Seller pays for shipping charges) LO 3 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Transportation Costs Nov.24 Merchandise Inventory 75 Cash 75 Paid freight charges on purchased merchandise. LO 3 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Sales of Merchandise 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 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Customer Payment Case 1-Customer pays in 60 days Case 2-Customer pays in 10 days Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale Nov.22 Cash 980 Sales discounts 20 Accounts receivable 1,000 Received payment less the discount LO 3 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Sales Returns and Allowances 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 © 2013 McGraw-Hill Ryerson Limited.

Perpetual Merchandise Inventory Adjustments- Perpetual Merchandise Inventory Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions. Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory). LO 4 © 2013 McGraw-Hill Ryerson Limited.

Perpetual System — Example Inventory per accounting records: $21,250 Inventory per physical count: -$21,000 Difference (shrinkage) $250 Adjustment required: Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250 To record inventory shrinkage revealed by physical count. LO 4 © 2013 McGraw-Hill Ryerson Limited.

Income Statement Formats Income statements may be formatted in a variety of ways. Typical formats are: Classified, Multiple-Step Multiple-Step Single-Step LO 5 © 2013 McGraw-Hill Ryerson Limited.

Classified Multi-step Format (for internal reporting) © 2013 McGraw-Hill Ryerson Limited. LO 5

(for external reporting) Multi-step Format (for external reporting) LO 5 © 2013 McGraw-Hill Ryerson Limited.

(for external reporting) Single- step Format (for external reporting) LO 5 © 2013 McGraw-Hill Ryerson Limited.

Gross profit from sales Gross Profit Ratio The amount of gross profit expressed as a percentage of net sales. May be tracked over time and/or compared to similar businesses. May be calculated for whole business, departments, products. Gross profit from sales Net sales Gross profit ratio = X 100% LO 5 © 2013 McGraw-Hill Ryerson Limited.

Closing Entries-Perpetual System The closing process is similar for merchandising and service companies. Merchandising companies have additional temporary accounts that must be closed. These include: Sales Sales Returns & Allowances Sales Discounts Cost of Goods Sold LO 6 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Review Identify and explain the components of income for a merchandising company. The basic components of income start with net sales. From net sales is subtracted the cost of goods sold. The resulting amount is called gross profit or gross margin. Selling and general and administrative expenses are subtracted from gross profit to determine income from operations. © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Review Explain the difference between single-step and multiple-step income statements. A A single-step income statement format includes cost of goods sold as an operating expense, and shows only one subtotal for total expenses. Operating expenses are highly summarized. A multiple-step income statement shows intermediate totals between sales and net income. It also includes detailed computations of net sales and cost of goods sold. © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5A- Periodic and Perpetual Merchandise Inventory Systems Compared Periodic systems Merchandise Inventory is updated at the end of the period based on a physical count. Perpetual systems Merchandise Inventory is updated after each sale or purchase. LO 7 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5A - Example Periodic System Perpetual System Purchase of Merchandise Purchases 1200 Merchandise Inventory 1200 Accounts Payable 1200 Accounts Payable 1200 Return of Merchandise Accounts Payable 300 Accounts Payable 300 Purchase Returns 300 Merchandise Inventory 300 LO 7 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5A - Example Periodic System Perpetual System Purchase Discount Taken (2/10, n30) Accounts Payable 900 Accounts Payable 900 Purchase Discounts 18 Merchandise Inventory 18 Cash 882 Cash 882 Transportation Charges Transportation-in 75 Merchandise Inventory 75 Cash 75 Cash 75 LO 7 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5A - Example Periodic System Perpetual System Sale of merchandise Accounts Receivable 2400 Accounts Receivable 2400 Sales 2400 Sales 2400 Cost of Goods Sold 1600 Merchandise Inventory 1600 LO 7 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5A - Example Periodic System Perpetual System Sales Return Sales Returns & Allow. 800 Sales Returns & Allow. 800 Accounts Receivable 800 Accounts Receivable 800 Merchandise Inventory 600 Cost of Goods Sold 600 LO 7 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5B – Sales Tax Provincial Sales Tax (PST) A consumption tax applied on sales to the final consumers of products or services. Is not applicable to all sales. Varies from province to province. Amount collected is a liability. LO 8 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5B - Sales Tax Goods and Services Tax (GST) A 5% tax on almost all goods and services provided in Canada. Is ultimately paid by the final consumer. Is uniform from province to province. Amount collected by a business is a liability. Amount paid by a business offsets the GST owing. LO 8 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5B - Sales Tax Harmonized Sales Tax (HST) Is a combined GST and PST rate applied to taxable supplies. LO 8 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5B - Example Purchase of Merchandise Assume: Perpetual system and 5% GST. Merchandise Inventory 600 GST Receivable 30 Accounts Payable 630 LO 8 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. Appendix 5B - Example Sale of Merchandise Assume: Perpetual system, 7% PST and 5% GST. Accounts Receivable 1,008 Sales 900 PST Payable 63 GST Payable 45 To record sale of merchandise Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold LO 8 © 2013 McGraw-Hill Ryerson Limited.

© 2013 McGraw-Hill Ryerson Limited. End of Chapter © 2013 McGraw-Hill Ryerson Limited.