Financial Accounting, 5e California State University, Weygandt, Kieso, & Kimmel Prepared by Kurt M. Hull, MBA CPA California State University, Los Angeles John Wiley & Sons, Inc.

ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS STUDY OBJECTIVES After studying this chapter, you should understand: The differences between a service company and a merchandiser Single & multiple step income statements Purchase entries—perpetual inventory How to compute gross profit Revenue entries--perpetual inventory COGS -- periodic inventory Completing the accounting cycle

MERCHANDISER VS. SERVICE COMPANY Wholesalers/Retailers STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY A merchandiser buys and sells goods to earn a profit. Wholesalers/Retailers COGS A service company provides a service to earn a profit. No COGS -

INCOME MEASUREMENT MERCHANDISER Less Sales Revenue Equals Cost of Goods Sold Gross Profit Less Equals Net Income (Loss) Operating Expenses

OPERATING CYCLE COMPARISON Merchandising Company Service Company Receive Cash Cash Perform Services Accounts Receivable Merchandising Company Receive Cash Buy Inventory Cash Sell Inventory Merchandise Inventory Accounts Receivable

INVENTORY SYSTEMS SOLD SOLD PERPETUAL INVENTORY End of period No entry Inventory purchased Item sold SOLD Record purchase Record revenue & COGS PERIODIC INVENTORY Inventory purchased Item sold End of period Compute and record COGS SOLD Record purchase Record revenue only

PURCHASE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY MERCHANDISE INVENTORY CASH Cash purchase COST COST A/P Credit purchase MERCHANDISE INVENTORY COST COST The purchase is normally recorded when the goods are received Credit purchases are normally supported by a purchase invoice

PURCHASE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY 3800 Cash purchase 3800 3 800 Credit purchase

SHIPPING TERMS – FREE ON BOARD FOB SHIPPING POINT FOB DESTINATION Title transfers to buyer at sellers shipping dock Buyer pays freight costs Title transfers to buyer at buyers receiving dock Seller pays freight costs

ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 150 May 6 Merchandise Inventory Cash (To record payment of freight, terms FOB shipping point) Freight costs are part of the cost of inventory purchased.

ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 150 May 4 Freight-out (Delivery Expense) Cash (To record payment of freight on goods sold FOB destination) Freight costs incurred by the seller are selling expenses called Freight-out.

PURCHASE RETURNS AND ALLOWANCES GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 8 Accounts Payable 300 Merchandise Inventory (To record return of inoperable goods received from Highpoint Electronic, DM No. 126) For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited. Buyer Seller

PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. 3,500 3,430 70 May 14 Accounts Payable Cash Merchandise Inventory (To record payment within discount period) If payment is made within the discount period, Merchandise inventory is credited for the discount taken.

PAYMENT AFTER DISCOUNT PERIOD PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD GENERAL JOURNAL Date Account Titles and Explanation Debit Credit June 3 Accounts Payable 3,500 Cash (To record payment with no discount taken) If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount.

REVENUE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 3 REVENUE ENTRIES – PERPETUAL INVENTORY Revenues are reported when earned in accordance with the revenue recognition principle. In a merchandising company, revenues are earned when the goods are transferred from seller to buyer. All sales should be supported by a cash register tape or sales invoice.

REVENUE ENTRIES – PERPETUAL INVENTORY GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 4 Accounts Receivable 3,800 2,400 Sales (To record credit sales to Chelsea Video per invoice #731) 4 Cost of Goods Sold Merchandise Inventory (To record cost of merchandise sold on invoice #731 to Chelsea Video) For cash sales, simply replace the debit to accounts receivable with a debit to cash.

SALES RETURNS & ALLOWANCES Customer returns goods to the seller for credit or a refund. SALES ALLOWANCE Seller allows a reduction in selling price. Goods are not returned. Seller prepares a CREDIT MEMORANDUM.

RECORDING SALES RETURNS & ALLOWANCES GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 8 Sales Returns and Allowances Accounts Receivable (To record credit granted to Beyer Video, for returned goods) 8 Merchandise Inventory Cost of Goods Sold 300 140 (To record cost of goods returned ) Sales Returns and Allowances is a CONTRA-REVENUE account. It’s normal balance is a DEBIT.

SALES DISCOUNTS Seller offers customer a cash discount for prompt payment of balance due. Credit terms indicate the discount percent, Discount period, and final due date. 2/10, n/30 A 2% discount may be taken if payment is made within 10 days of the invoice date. 1/10 EOM A 1% discount is available if payment is made by the 10th of the next month.

RECORDING SALES DISCOUNTS GENERAL JOURNAL Date Account Titles and Explanation Dr. Cr. May 14 Cash 3,430 70 3,500 Sales Discounts Accounts Receivable (To record collection within 2/10, n/30 discount period from Beyer Video) Sales discounts is a CONTRA-REVENUE ACCOUNT. It’s normal balance is a DEBIT.

COMPLETING THE ACCOUNTING CYCLE Study Objective 4 After all adjustments have been posted, closing entries are prepared from the Income Statement section of the worksheet. All accounts that affect the determination of net income are closed to Income Summary. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit (1) Dec. 31 Sales Income Summary (To close income statement accounts with credit balances). 480,000

CLOSING ENTRIES Cost of Goods Sold is closed to Income Summary. GENERAL JOURNAL Date Account Titles and Explanation Debit Credit (2) Dec. 31 Income Summary Sales Returns and Allowances Sales Discounts Cost of goods sold Store Salaries Expense Rent Expense 450,000 12,000 8,000 316,000 45,000 19,000 7,000 16,000 17,000 2,000 Freight - out Advertising Expense Utilities Expense Depreciation Expense Insurance Expense (To close income statement accounts with debit balances)

CLOSING ENTRIES GENERAL JOURNAL Date Account Titles and Explanation Debit Credit 2002 (3) Dec. 31 Income Summary Retained Earnings (To close net income to retained earnings ) (4) 31 30,000 15,000 Dividends (To close dividends to retained earnings ) After the closing entries are posted, all temporary accounts have zero balances, and Retained Earnings has a credit balance of $48000.

CLOSING ENTRIES REVIEW QUESTION Orlaida Company has the following merchandise account balances: Sales $192,000 Sales Discounts $2,000 Cost of Goods Sold $105,000 Merchandise Inventory $40,000 Prepare entries to record the closing of these items to Income Summary. Account Debit Credit Sales $192,000 Sales Discounts $2,000 Cost of Goods Sold $105,000 Income Summary $85,000

MULTIPLE - STEP INCOME STATEMENT Computation of Net Sales STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT Illustration 5-6 Computation of Net Sales Sales revenues Sales $480,000 Less: Sales returns & allowances $12,000 Sales Discounts 8,000 20,000 Net Sales $460,000

MULTIPLE - STEP INCOME STATEMENT STUDY OBJECTIVES 5 & 6 MULTIPLE - STEP INCOME STATEMENT The multiple step income statement arrives at net income in stages. Sellers Electronix Income Statement Net Sales $460,000 Less: Cost of Goods Sold 316,000 Gross Profit $144,000 Operating Expenses 114,000 Net Income $30,000 The multiple step income statement also distinguished between operating and non-operating activities.

MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES OTHER REVENUES & GAINS OTHER LOSSES & EXPENSES Interest revenue Interest expense Dividend revenue Casualty losses Rent revenue Loss from employee strikes Gains on sale of assets Loss on sale of assets

SINGLE-STEP INCOME STATEMENT Sellers Electronix Income Statement For the Year Ended December 31, 2006 Revenues Net sales $ 460,000 Interest revenue 3,000 Gain on sale of equipment 600 Total revenues 463,600 Expe nses Cost of goods sold $ 316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty loss from vandalism All data are classified under two categories: 1 Revenues 2 Expenses Only one step is required in determining net income or net loss. 200 Total expenses 432,000 Net income $ 31,600

STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY Sellers Electronix Cost of Goods Sold For the year ended December 31, 2006 Cost of Goods Sold Inventory, January 1 $36,000 Purchases $325,000 Less: Purchase returns & allowances $10,400 Purchase discounts 6,800 17,200 Net purchases 307,800 Add: Freight-in 12,200 Cost of Goods Purchased 320,000 Cost of Goods Available for Sale 356,000 Inventory, December 31 40,000 316,000

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CHAPTER 5 ACCOUNTING FOR MERCHANDISING OPERATIONS