Merchandising Operations Chapter 5 5-1Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives 1.Describe merchandising operations and the two types of merchandise inventory systems 2.Account for the purchase of merchandise inventory using a perpetual inventory system 3.Account for the sale of merchandise inventory using a perpetual inventory system 5-2Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objectives 4.Adjust and close the accounts of a merchandising business 5.Prepare a merchandiser’s financial statements 6.Use the gross profit percentage to evaluate business performance 7.Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5A) 5-3Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 1 Describe merchandising operations and the two types of merchandise inventory systems 5-4Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

What Are Merchandising Operations? Seller of goods Can be wholesaler or retailer Inventory is a very important asset Managing A/R is critical to success 5-5Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Merchandiser Financial Statements Income Statement differs from a service company Cost of Goods Sold Gross Profit 5-6Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Merchandiser Financial Statements Largest expense for merchandisers Calculated as: Net Sales—COGS 5-7Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Merchandiser Financial Statements Merchandise Inventory is usually the only type of inventory.Merchandise Inventory is usually the only type of inventory. –(There is no raw materials or work-in-progress.) Merchandise Inventory is usually purchased on credit, so Accounts Payable may also be higher than a Service Company.Merchandise Inventory is usually purchased on credit, so Accounts Payable may also be higher than a Service Company. 5-8Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 2 Account for the purchase of merchandise inventory using a perpetual inventory system 5-9Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Periodic Inventory is physically counted Inexpensive inventory Small shops without opscan capability As computer technology takes over more and more accounting, the Periodic Method is used less and less. 5-10Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall

Perpetual When items are scanned in the receiving dock or at the cash register, the inventory is automatically updated on a continuous basis. Every inflow and outflow is tracked in real time Merchandising and purchase systems are integrated with the accounting system 5-11Copyright ©2014 Pearson Education, Inc. Publishing as Prentice Hall

5-12Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase of Inventory Assume that Smart Touch Learning pays for the inventory at the point of sale. 5-13Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase on Account If we had received the inventory, but chosen to pay later Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase Returns and Allowances When all or a portion of a purchase is returned to the seller, it is recorded as a reduction of the merchandise inventory account. Assume Smart Touch Learning returns $7,000 of the June 3 purchase on June Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Transportation Costs While goods are in transit, rules are necessary to determine who bears the risk of loss. 5-16Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Freight In With FOB shipping point, the freight cost is paid by the buyer and is part of the inventory cost. Assume Smart Touch Learning pays a $60 freight charge on the June 3 purchase. 5-17Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase Discounts Invoices that accompany credit purchases often indicate “credit terms,” which offer the buyer discount if they pay early. 5-18Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase Discounts The amount of the discount is determined by the “credit terms” indicated on the invoice. 3/15, NET 30 DAYS Discount Period DiscountPercent Total Credit Period 5-19Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchase Discounts If Smart Touch Learning pays within the 15 day period, they get a 3% discount. 5-20Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

A Look at the Merchandise Inventory Account... The merchandise inventory account will reflect the net results of all the transactions for the period. 5-21Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 3 Account for the sale of merchandise inventory using a perpetual inventory system 5-22Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

5-23Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Recording a Sale In a perpetual system, two entries must be made for every sale –Record the sale –Record the reduction of inventory 5-24Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Recording a Cash Sale Smart Touch Learning sold 2 tablets for $1,000 cash. The cost of those tablets was $ Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Recording a Credit Sale Smart Touch Learning sold 10 tablets for $500 each on account. Sales terms are 2/10, n/30. The cost of those tablets was $3, Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Sales Returns Sales Returns and AllowancesMerchandise InventoryRequires an entry to Sales Returns and Allowances and to Merchandise Inventory. A customer returns 3 tablets that sold for $1,500 and originally cost $1, Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Sales Allowances Sales Returns and Allowances.Requires an entry to Sales Returns and Allowances. Smart Touch Learning grants a customer $100 for goods damaged in transit. There is no inventory to receive or record. 5-28Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Sales Discounts contra account The customer pays Smart Touch Learning on June 30, 9 days after the invoice date, and after the return and the allowance. Sales discounts is a contra account to Sales. 5-29Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Freight Out freight inThe freight in is part of the inventory cost. freight outThe freight out is a selling expense. Smart Touch Learning pays $30 to ship the June 21 sale to the customer. 5-30Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Net Revenue For the year, Smart Touch Learning sells $297,500 of merchandise inventory. They process $11,200 of sales returns and allowances, and they award $5,600 of sales discounts. What is Net Sales Revenue for the year? 5-31Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Net Revenue For the year, Smart Touch Learning sells $297,500 of merchandise inventory. They process $11,200 of sales returns and allowances, and they award $5,600 of sales discounts. What is Net Sales Revenue for the year? 5-32Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Gross Profit Net Sales Revenues Cost of Goods SoldThe difference between Net Sales Revenues and Cost of Goods Sold Indicates the amount available to cover operating expenses 5-33Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 4 Adjust and close the accounts of a merchandising business 5-34Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Adjusting Merchandise Inventory Actual inventory at the end of the period may differ from what is expected from the accounting records –Theft –Damage –Errors Inventory must be adjusted at the end of the period 5-35Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Closing the Accounts of a Merchandiser 1.Close revenues to Income Summary 2.Close expenses and contra-revenues to Income Summary 3.Close Income Summary to Retained Earnings 4.Close Dividends to Retained Earnings 5-36Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

5-37Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall Closing the Accounts of a Merchandiser

At this point, the Income Summary account has a $25,200 balance. Next, we need to close Income Summary to the Retained Earnings account. 5-38Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 5 Prepare a merchandiser’s financial statements 5-39Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Single-Step Income Statement Revenues and Expenses are separated into two reported sub- groupings. 5-40Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Multi-Step Income Statement Includes several important subtotals before the Net Income line. 5-41Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

We break our Operating Expenses into Selling Expenses & Admin Expenses. 5-42Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Finally, Net Income is determined by subtracting Other Revenues and Expenses from Operating Income. Most companies will use a multi-step income statement. 5-43Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 6 Use the gross profit percentage to evaluate business performance 5-44Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Gross Profit Percentage Measures the profitability of each sales dollar. When this number is trending downward, it can indicate a significant problem. 5-45Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Gross Profit Percentage—Example 5-46Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Learning Objective 7 Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5A) 5-47Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Purchasing Merchandise Inventory in a Periodic System Inventory-related expenses are recorded in separate accounts DURING the year, and combined at the end of the period. –Purchases –Purchase Discounts –Purchase Returns and Allowances –Freight-In 5-48Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

5-49Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Journal Entries in a Periodic System On June 3, Smart Touch Learning acquires inventory on account for $35, Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Journal Entries in a Periodic System Purchases On June 3, Smart Touch Learning acquires inventory on account for $35,000. Note that Purchases is debited instead of Merchandise Inventory. 5-51Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Journal Entries in a Periodic System On June 3, Smart Touch Learning paid a freight bill related to a receipt of inventory. 5-52Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Journal Entries in a Periodic System On June 4, Smart Touch Learning returned $7,000 of the inventory purchased on June 3rd for credit. 5-53Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Journal Entries in a Periodic System On June15, Smart Touch Learning pays the remaining amount on the payable from June 3, taking the purchase discount. 5-54Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Closing the Accounts Assume the following balances on the December 31 Adjusted Trial Balance: Merchandise Inventory (beginning) = $0 Merchandise Inventory (ending) = $31,290 Purchases = $281,750 Purchase Returns and Allowances = $61,250 Purchase Discounts = $4,410 Freight In = $14, Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Closing the Accounts Purchase Returns and Allowances Purchase Discounts Close the credit balance accounts (Purchase Returns and Allowances and Purchase Discounts) to Income Summary and record ending Merchandise Inventory. 5-56Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Closing the Accounts Purchases Freight In Close the debit balance accounts (Purchases and Freight In) to Income Summary and remove beginning Merchandise Inventory. 5-57Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

Reporting Cost of Goods Sold 5-58Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall

End of Chapter Copyright ©2014 Pearson Education, Inc. publishing as Prentice Hall