1. Chapter 5-1 Chapter 5 Accounting for Merchandising Operations Accounting Principles, Ninth Edition

2. Chapter 5-2 1. 1.Identify the differences between service and merchandising companies. 2. 2.Explain the recording of purchases under a perpetual inventory system. 3. 3.Explain the recording of sales revenues under a perpetual inventory system. 4. 4.Explain the steps in the accounting cycle for a merchandising company. 5. 5.Distinguish between a multiple-step and a single-step income statement. 6. 6.Explain the computation and importance of gross profit. Study Objectives

3. Chapter 5-3 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

4. Chapter 5-4 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.

5. Chapter 5-5 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.

6. Chapter 5-6 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.

7. Chapter 5-7 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.

8. Chapter 5-8 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.

9. Chapter 5-9 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

10. Chapter 5-10 Under the perpetual inventory system, companies record in the Merchandise Inventory account the purchase of goods they intend to sell. Illustration: Illustration: At May 4th, (Ahmed) Company Purchases goods from (Ali) Company by $3800 The entry in Ahmed Books is: Merchandise inventory3,800May 4 Accounts payable 3,800 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system.

11. Chapter 5-11 Illustration 5-6 Seller places goods Free On Board to 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.

12. Chapter 5-12 Illustration: Assume upon delivery of the goods on May 6, Ahmed Company pays to Freight Company $150 for freight charges (Terms of sales are FOB shipping point). the entry on Ahmed’s books is: Merchandise inventory150 May 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

13. Chapter 5-13 Recording Purchases of Merchandise SO 2 Explain the recording of purchases under a perpetual inventory system. Assume the freight terms on the invoice had required Ali Company to pay the freight charges. On the Ahmed’s book: NO entry

14. 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.

15. 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.

16. 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 Ahmed Company returned to Ali Company goods costing $300. The entry On Ahmed’s Book is: Accounts payable300 May 8 Merchandise inventory 300

17. 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.

18. 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.

19. 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 Ahmed Company 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 Ahmed makes to record its May 14 payment.

20. 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 Ahmed failed to take the discount, and instead made full payment of $3,500 on June 3, the journal entry would be:

21. Chapter 5-21 Should discounts be taken when offered? Purchase Discounts Recording Purchases of Merchandise Example: 2% for 20 days = Annual rate of 36.5% (365/20 = 18.25 twenty-day periods x 2% = 36.5%) Passing up the discount offered equates to paying an interest rate of 2% on the use of $3,500 for 20 days. SO 2 Explain the recording of purchases under a perpetual inventory system.

22. Chapter 5-22 $3,5008 th - Return$300 Balance 4 th - Purchase $3,580 7014 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.

23. Chapter 5-23 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

24. Chapter 5-24 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

25. Chapter 5-25 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 Ali Company records its May 4 sale of $3,800 to Ahmed Company as follows: Assume the merchandise cost Ali Company by $2,400. Cost of goods sold2,4004 Merchandise inventory 2,400

26. Chapter 5-26 “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.

27. Chapter 5-27 Illustration: Prepare the entry Ali Company 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

28. Chapter 5-28 Illustration: Assume the returned goods were defective and had a scrap value of $50. Ali Company 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

29. Chapter 5-29 The cost of goods sold is determined and recorded each time a sale occurs in: a.periodic inventory system only. b.a perpetual inventory system only. c.both a periodic and perpetual inventory system. d.neither a periodic nor perpetual inventory system. Review Question Recording Sales of Merchandise SO 3 Explain the recording of sales revenues under a perpetual inventory system.

30. Chapter 5-30