Reporting & Analyzing Merchandising Operations Chapter 4

Merchandising Activities Merchandise Consists of products that a company acquires to resell to customers Retailer Is an intermediary that buys products from manufacturers and wholesalers                                                 

Income Statement Net sales = (Sales – sales return) Less Cost of goods sold Gross profit Less expenses Net income

Inventory Systems Cost of goods sold Inventory Is the cost of merchandise sold to customers during a period. Largest single expense on a merchandiser’s income statement Inventory Refers to products a company owns and expects to sell in its normal operations Assets

Inventory Systems Perpetual system Periodic Inventory system Continually updates accounting records for merchandising transactions Periodic Inventory system Updates the accounting records for merchandise transactions only at the end of a period.

Accounting for Merchandising Purchases Merchandise inventory – Cost of merchandise purchased for resale. Purchase cost, shipping fees, taxes, etc. Purchased $1,200 of merchandise on credit Merchandise inventory 1,200 Accounts payable 1,200

Trade Discount When a manufacturer or wholesaler prepares a catalog of items it has for sale, it usually gives each item a list price. Trade discount An item’s intended selling price equals list price minus a given percent. Purchase discounts Cash discount on the list price

Terms Credit terms For a purchase include the amounts and timing of payments from a buyer to a seller EOM End of month

Purchase Discount Credit terms: 2/10, n/30 2% discount within 10 days Full amount in 30 days Purchased merchandise on credit $3,000 Merchandise inventory 3,000 Accounts payable 3,000

Purchase Discount Paid the prior purchase within the discount period. Gross invoice: $3,000 2% discount 60 Net to be paid 2,940

Purchase discount Accounts payable 3,000 Merchandise inventory 60 Cash 2940 Reduction in merchandise inventory to reflect the true cost.

Example 2: Purchased merchandise on account $5,000, terms 1/10, n/60. Record the payment within the discount period

Example 2 Merchandise inventory 5,000 Accounts payable 5,000 Invoice 5,000 Discount 50 Net of invoice 4,950

Example 2 Accounts payable 5,000 Merchandise inventory 50 Cash 4950

Purchases Returns & Allowances Refers to merchandise a buyer acquires but then returns to the seller. Allowance is a reduction in price for defective merchandise

Purchase returns Global returns merchandise worth $500 and purchased on account. Accounts payable 500 Merchandise inventory 500

Transportation Costs FOB Which determines who pays transportation costs Shipping point Means the buyer accepts ownership when the goods depart the seller’s place of business.

Transportation Costs Destination Means ownership of goods transfer to the buyer when the goods arrive at the buyer’s place of business.

Transportation Cost Mackey purchases merchandise FOB shipping point. Transportation costs of $75 paid cash Merchandise inventory 75 Cash 75

Sales of Merchandise Each sales transaction for a seller of merchandise involves two parts. Revenue Cost of goods sold

Sales of Merchandise Cost of goods sold Sales Records the cost of the goods sold. Expense account Reduces the balance in the inventory account Sales Revenue account                                                                                                                                                 

Entry for Sales Sold merchandise on credit for $2,400. Merchandise had a cost of $1,600 Accounts receivable 2,400 Sales 2,400 Cost of goods sold 1,600 Merchandise inventory 1,600

Example 3 Mary sold merchandise on account for $5,000 with a cost of $2,000. Record the entries for the sale.

Example 3 Accts receivable 5,000 Sales 5,000 Cost of goods sold 2,000 Merchandise inventory 2,000

Sales Discount Reduction in the price of the good for early payment Expense account

Sales Discount Suppose that merchandise is sold for $5,000 with terms 2/10, n30. Cost of $2,500. Record the sale Accts receivable 5,000 Sales 5,000 Cost of goods sold 2,500 Merchandise inventory 2,500

Sales Discount Record the payment within the discount period Net price 4,900

Sales Discount Cash 4,900 Sales discount 100 Accounts receivable 5,000

Example 4 Suppose that merchandise sold on account for $6,000 terms 1/15, n/30. Record the payment within the discount period.

Example 4 Sales 6,000 Discount 1% 60 Net 5,940 Cash 5,940 Accts receivable 6,000

Sales Returns & Allowances Returns: refer to merchandise that customers return to the seller after sale Allowances – reductions in price of the merchandise sold to customers

Sales Returns & Allowances Contra revenue account Increases with a debit Suppose that merchandise sold for $3,000 with cost of $1,600 is returned. Sales Returns 3,000 Accounts receivable 3,000 Merchandise inventory 1,600 Cost of goods sold 1.600

Homework Purchases Sales Buyer/Seller Revenues EX 4-1, 4-5