Chapter 5-1

Chapter 5-2 Chapter 5 Accounting for Merchandising Operations Accounting Principles, Ninth Edition

Chapter Identify the differences between service and merchandising companies Explain the recording of purchases under a perpetual inventory system Explain the recording of sales revenues under a perpetual inventory system Explain the steps in the accounting cycle for a merchandising company Distinguish between a multiple-step and a single-step income statement Explain the computation and importance of gross profit. Study Objectives

Chapter 5-4 Forms of Financial Statements Accounting for Merchandising Operations Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions MerchandisingOperationsMerchandisingOperations Recording Purchases of Merchandise Recording Sales of Merchandise Completing the Accounting Cycle Operating cycles Flow of costs— perpetual and periodic inventory systems Sales returns and allowances Sales discounts Adjusting entries Closing entries Summary of merchandising entries Multiple-step income statement Single-step income statement Classified balance sheet

Chapter 5-5 Merchandising Operations SO 1 Identify the differences between service and merchandising companies. Merchandising Companies Buy and Sell Goods WholesalerRetailerConsumer The primary source of revenues is referred to as sales revenue or sales.

Chapter 5-6 Merchandising Operations Income Measurement Illustration 5-1 Cost of goods sold is the total cost of merchandise sold during the period. Not used in a Service business. Net Income (Loss) Less Equals Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses SO 1 Identify the differences between service and merchandising companies.

Chapter 5-7 The operating cycle of a merchandising company ordinarily is longer than that of a service company. Operating Cycles Illustration 5-2 SO 1 Identify the differences between service and merchandising companies.

Chapter 5-8 Features: Perpetual System 1. Purchases increase Merchandise Inventory. 2. Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory. 3. Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale. 4. Physical count done to verify Merchandise Inventory balance. The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold. Flow of Costs SO 1 Identify the differences between service and merchandising companies.

Chapter 5-9 Features: Periodic System 1. Purchases of merchandise increase Purchases. 2. Ending Inventory determined by physical count. 3. Calculation of Cost of Goods Sold: Flow of Costs Beginning inventory$ 100,000 Add: Purchases, net800,000 Goods available for sale900,000 Less: Ending inventory125,000 Cost of goods sold$ 775,000 SO 1 Identify the differences between service and merchandising companies.

Chapter 5-10 Made using cash or credit (on account). Normally recorded when goods are received. Purchase invoice should support each credit purchase. Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration 5-5

Chapter 5-11 Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell. Illustration: Illustration: From INVOICE NO. 731 (Illustration 5-5) record the journal entry Sauk Stereo would make to record its purchase from PW Audio Supply. Merchandise inventory3,800May 4 Accounts payable 3,800 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-12 Illustration 5-6 Seller places goods Free On Board the carrier, and buyer pays freight costs. Seller places goods Free On Board to the buyer’s place of business, and seller pays freight costs. Recording Purchases of Merchandise Freight Costs – Terms of Sale Freight costs incurred by the seller are an operating expense.

Chapter 5-13 Illustration: Assume upon delivery of the goods on May 6, Sauk Stereo pays Acme Freight Company $150 for freight charges, the entry on Sauk Stereo’s books is: Merchandise inventory150May 6 Cash 150 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Assume the freight terms on the invoice in Illustration 5-5 had required PW Audio Supply to pay the freight charges, the entry by PW Audio Supply would have been: Freight-out (or Delivery Expense)150May 6 Cash 150

Chapter 5-14 Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications. Purchase Returns and Allowances Recording Purchases of Merchandise Return goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash. May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price. Purchase Return Purchase Allowance SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-15 In a perpetual inventory system, a return of defective merchandise by a purchaser is recorded by crediting: a.Purchases b.Purchase Returns c.Purchase Allowance d.Merchandise Inventory Question Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-16 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume that on May 8 Sauk Stereo returned to PW Audio Supply goods costing $300. Accounts payable300May 8 Merchandise inventory 300

Chapter 5-17 Credit terms may permit buyer to claim a cash discount for prompt payment. Advantages: Purchaser saves money. Seller shortens the operating cycle. Purchase Discounts Recording Purchases of Merchandise Example: Credit terms of 2/10, n/30, is read “two-ten, net thirty.” 2% cash discount if payment is made within 10 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-18 Purchase DiscountsTerms Purchase Discounts Terms Recording Purchases of Merchandise 2% discount if paid within 10 days, otherwise net amount due within 30 days. 1% discount if paid within first 10 days of next month. 2/10, n/301/10 EOM Net amount due within the first 10 days of the next month. n/10 EOM SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-19 Accounts payable3,500May 14 Cash 3,430 Recording Purchases of Merchandise Merchandise Inventory 70 (Discount = $3,500 x 2% = $70) SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry Sauk makes to record its May 14 payment.

Chapter 5-20 Accounts payable3,500June 3 Recording Purchases of Merchandise Cash 3,500 SO 2 Explain the recording of purchases under a perpetual inventory system. Illustration: If Sauk Stereo failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:

Chapter 5-21 $3,8008 th - Return$300 Balance 4 th - Purchase $3, th - Discount Recording Purchases of Merchandise Summary of Purchasing Transactions 1506 th – Freight-in Illustration SO 2 Explain the recording of purchases under a perpetual inventory system.

Chapter 5-22 Made for cash or credit (on account). Normally recorded when earned, usually when goods transfer from seller to buyer. Sales invoice should support each credit sale. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Illustration 5-5

Chapter 5-23 Two Journal Entries to Record a Sale Cash or Accounts receivableXXX Sales XXX Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. #1 Cost of goods soldXXX Merchandise inventory XXX #2 Selling Price Cost

Chapter 5-24 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Accounts receivable3,800May 4 Sales 3,800 Illustration: Assume PW Audio Supply records its May 4 sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows. Assume the merchandise cost PW Audio Supply $2,400. Cost of goods sold2,4004 Merchandise inventory 2,400

Chapter 5-25 “Flipside” of purchase returns and allowances. Contra-revenue account (debit). Sales not reduced (debited) because:  would obscure importance of sales returns and allowances as a percentage of sales.  could distort comparisons between total sales in different accounting periods. Sales Returns and Allowances Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Chapter 5-26 Illustration: Prepare the entry PW Audio Supply would make to record the credit for returned goods that had a $300 selling price (assume a $140 cost). Assume the goods were not defective. Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 300May 8 Accounts receivable300 Merchandise inventory 1408 Cost of goods sold140

Chapter 5-27 Illustration: Assume the returned goods were defective and had a scrap value of $50, PW Audio would make the following entries: Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Sales returns and allowances 300May 8 Accounts receivable300 Merchandise inventory 508 Cost of goods sold50

Chapter 5-28

Chapter 5-29 Offered to customers to promote prompt payment. “Flipside” of purchase discount. Contra-revenue account (debit). Sales Discount Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Chapter 5-30 Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system. Cash3,430May 14 Accounts receivable3,500 Sales discounts70 * [($3,800 – $300) X 2%] * Illustration: Assume Sauk Stereo pays the balance due of $3,500 (gross invoice price of $3,800 less purchase returns and allowances of $300) on May 14, the last day of the discount period. Prepare the journal entry PW Audio Supply makes to record the receipt on May 14.

Chapter 5-31 Q5-9 Joan Roland believes revenues from credit sales may be earned before they are collected in cash. Do you agree? Explain. Discussion Question See notes page for discussion Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Chapter 5-32 Completing the Accounting Cycle Closing Entries

Chapter 5-33 Shows several steps in determining net income. Two steps relate to principal operating activities. Distinguishes between operating and non- operating activities. Multiple-Step Income Statement Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

Chapter 5-34 SO 6 Explain the computation and importance of gross profit. SO 6 Explain the computation and importance of gross profit. Illustration 5-13 Key Items: Net sales Gross profit Gross profit rate Illustration 5-10 Calculation of Gross Profit

Chapter 5-35 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses SO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-13 Multiple- Step

Chapter 5-36 Forms of Financial Statements Key Items: Net sales Gross profit Operating expenses Nonoperating activities Net income SO 5 Distinguish between a multiple-step and a single-step income statement. Illustration 5-13

Chapter 5-37 The multiple-step income statement for a merchandiser shows each of the following features except: a.gross profit. b.cost of goods sold. c.a sales revenue section. d.investing activities section. Review Question Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

Chapter 5-38 Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses. 2) Format is simpler and easier to read. Single-Step Income Statement Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

Chapter 5-39 Illustration 5-14 Single- Step Forms of Financial Statements SO 5 Distinguish between a multiple-step and a single-step income statement.

Chapter 5-40 Forms of Financial Statements Illustration 5-15 Classified Balance Sheet SO 5 Distinguish between a multiple-step and a single-step income statement.

Chapter 5-41 Periodic System Separate accounts used to record purchases, freight costs, returns, and discounts. Company does not maintain a running account of changes in inventory. Ending inventory determined by physical count. SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

Chapter 5-42 Calculation of Cost of Goods Sold $316,000 Illustration 5A-1 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Periodic Inventory System

Chapter 5-43 Recording Purchases under Periodic System SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows. Purchases3,800May 4 Accounts payable 3,800

Chapter 5-44 Recording Purchases under Periodic System SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: If Sauk pays Haul-It Freight Company $150 for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is: Freight-in (Transportation-in)150May 6 Cash 150 Freight Costs

Chapter 5-45 Recording Purchases under Periodic System SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return. Accounts payable300May 8 Purchase returns and allowances 300 Purchase Returns and Allowances

Chapter 5-46 Recording Purchases under Periodic System SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days. Sauk Stereo records the payment and discount as follows. Accounts payable3,500May 14 Purchase discounts 70 Purchase Discounts Cash 3,430

Chapter 5-47 No entry is recorded for cost of goods sold at the time of the sale under a periodic system. SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Recording Sales under Periodic System Illustration: Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May 4 (sales invoice No. 731, Illustration 5-5) as follows. Accounts receivable3,800May 4 Sales 3,800

Chapter 5-48 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows. Sales returns and allowances300May 4 Accounts receivable 300 Sales Returns and Allowances Recording Sales under Periodic System

Chapter 5-49 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Illustration: Illustration: On May 14, PW Audio Supply receives payment of $3,430 on account from Sauk Stereo. PW Audio honors the 2% cash discount and records the payment of Sauk’s account receivable in full as follows. Sales Discounts Recording Sales under Periodic System Cash3,430May 14 Accounts receivable3,500 Sales discounts70

Chapter 5-50 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Comparison of Entries—Perpetual Vs. Periodic Illustration 5A-2

Chapter 5-51 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system. Comparison of Entries—Perpetual Vs. Periodic Illustration 5A-2

Chapter 5-52 Worksheet for a Merchandising Company Illustration 5B-1

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