CHAPTER 5 MERCHANDISE OPERATIONS

TYPES OF BUSINESS SERVICE, E.G., MASSAGE PARLOR MERCHANDISE, E.G., 7-11 COMBINATION, E.G., AUTO REPAIR

MERCHANDISE OPERATION BUY MERCHANDISE -- + INVENTORY - CASH SELL MERCHANDISE -- - INVENTORY -- BILLS CUSTOMER (+ ACCOUNTS RECEIVABLE) GETS CASH + CASH - ACCOUNTS RECEIVABLE

WHEN DOES PURCHASE OF INVENTORY OCCUR FOB, SHIPPING POINT. WHEN SHIPPED AND BUYER PAYS FREIGHT FOB, DESTINATION. WHEN RECEIVED AND SELLER PAY FREIGHT PRACTICAL SOLUTION: RECORED AS PURCHASE WHEN RECEIVED.

CARDINAL RULE WHAT YOU HAD IN THE BEGINNING + WHAT YOU PUT IN, IS STILL THERE OR IT IS GONE

COST OF GOODS SOLD BEGINNING INVENTORY + PURCHASES – ENDING INVENTORY = COST OF GOODS SOLD COST OF GOODS SOLD IS THE COST OF THE GOODS SOLD

PERPETUAL INVENTORY SYSTEM PURCHASE GOODS FOR 700 INVENTORY ACCOUNTS PAYABLE SELL GOODS FOR 1,000 THAT COST 700 ACCTS. REC. SALES CofGS INVENTORY 1,000 1,

PERIODIC INVENTORY SYSTEM PURCHASE GOODS FOR 700 PURCHASES ACCOUNTS PAYABLE SELL GOODS FOR 1,000 THAT COST 700 ACCTS. REC. SALES 1,000 1,000

PHYSICAL INVENTORY PERIODICALLY, PHYSICALLY COUNT THE INVENTORY AND ADJUST EVEN IF YOU USE A PERPETUAL INVENTORY SYSTEM, YOU SHOULD PHYSICALLY COUNT TO BE SURE THAT THE RECORDS ARE CURRENT

FREIGHT COST IF FOB SHIPPING POINT, NO EFFECT IF FOB DESTINATION, ADD TO COST OF GOODS IN INVENTORY PRACTICAL TREATMENT OF FREIGHT IN ADD TO COST OF GOODS SOLD

PURCHASE RETURNS AND ALLOWANCES RETURNS --- REVERSE PURCHASE TRADE DISCOUNT ---- RECORD PURCHASE NET OF DISCOUNT CASH DISCOUNT [DISCUSS LATER]

RECORDING SALES SALES ACCTS. RECEIVABLE CASH 1,000 1,000 1,000 1,000

SALES ALLOWANCES CUSTOMER GETS A DISCOUNT ACCTS. REC. SALES OR ACCTS. REC. SALES ALLOW. SALES ,000

SALES RETURNS AT SALE ACCTS. REC. SALES 1,000 1,000 RETURN GOODS ACCTS. REC. SALES RETURNS OR ACCTS. REC. SALES 75 75

MERCHANDISE RETURNED PUT BACK INTO INVENTORY INVENTORY COST OF GOODS SOLD IF NOT PUT BACK INTO INVENTORY COST OF GOODS RETURNED CofGS OR NOTHING

CASH DISCOUNTS OFFER A DISCOUNT IF ACCOUNT IS PAID EARLY, E.G., 2/10; N/30 PAYMENT IS DUE IN 30 DAYS BUT IF CUSTOMER PAYS WITHIN 10 DAYS OF INVOICE DATE, CUSTOMER PAYS 2% LESS THAN THE INVOICE AMOUNT

MANAGEMENT ASIDE IF DISCOUNT IS AVAILABLE (1) HOW MANY DAYS EARLY? E.G., 2/10; N/30 IS 20 DAYS EARLY (2) DIVIDE INTO THE NUMBER OF DAYS IN THE YEAR (MAKE IT EASY, USE 360) MULTIPLY BY RATE 18 X 2% 36%, ANNUAL RATE 18

ACCOUNTING FOR CASH DISCOUNTS ON PURCHASES MAKE THB 1,000 PURCHASE WITH 2/10; N/30 DISCOUNT AVAILABLE THEORETICALLY, AMOUNT OWED IS WHAT COULD BE PAID IN CASH PURCHASE ACCTS. PAY IF PAID WITHIN DISCOUNT PERIOD ACCTS. PAY CASH IF PAID AFTER DISCOUNT PERIOD ACCTS. PAY DISCOUNTS LOST CASH ,000

PRACTICALLY RECORD AT INVOICE PRICE PURCHASE ACCTS. PAY. 1,000 1,000 IF PAID WITHIN DISCOUNT PERIOD ACCTS. PAY. DISCOUNTS EARNED CASH 1, IF PAID AFTER DISCOUNT PERIOD ACCTS. PAY. CASH 1,000 1,000

COSTING INVENTORY THEORETICALLY, INVENTORY SHOULD BE COSTED AT IT’S NET (AFTER DISCOUNT) COST LIKE FREIGHT IN, IT’S NOT WORTH THE EFFORT AND MANAGEMENT WOULD RATHER SHOW A GAIN FROM PAYING EARLY THAN A LOSS FROM PAYING LATE BUT FROM A MANAGEMENT STANDPOINT, DISCOUNTS EARNED IS USELESS INFORMATION

INCOME STATEMENT ANALYSIS IF THE MULTIPLE STEP INCOME STATEMENT IS PRESENTED, THEN ONE CAN EVALUATE MORE INFORMATION TWO EVALUATION STATISTICS THAT ARE VALUABLE ARE: GROSS PROFIT MARGIN GROSS PROFIT/ SALES PROFIT MARGIN NET INCOME/ SALES