1. Copyright © 2016 by McGraw-Hill Education Chapter 6 Merchandising Operations and the Multistep Income Statement PowerPoint Author: Brandy Mackintosh, CA

2. 6-2 Learning Objective 6-1 Distinguish between service and merchandising operations.

3. 6-3 Operating Cycles

4. 6-4 Operating Cycles (in thousands) (in millions) (in thousands) (in millions)

5. 6-5 Learning Objective 6-2 Explain the differences between periodic and perpetual inventory systems.

6. 6-6 - = Gross Profit Inventory Systems Three accounts are particularly important to a merchandiser: Inventory The merchandiser’s total cost of acquiring goods that it has not yet sold Total selling price of all goods that the merchandiser did sell to customers Total cost of all goods that the merchandiser did sell to customers Sales Revenue Cost of Goods Sold

7. 6-7 Inventory Systems BI + P – EI = CGS or BI + P – CGS = EI $4,800 + 10,200 – 6,000 = $9,000 $4,800 + 10,200 – 9,000 = $6,000

8. 6-8 Periodic Inventory System A periodic inventory system updates the inventory records for merchandise purchases, sales, and returns only at the end of the accounting period. To determine how much inventory is on hand and how much inventory has been sold, periodic systems require that inventory be physically counted by the employees at the end of the period. BI + P – EI = CGS

9. 6-9 Perpetual Inventory System In a perpetual inventory system, the inventory records are updated “perpetually,” that is, every time inventory is bought, sold, or returned. Perpetual systems often are combined with bar codes and optical scanners.

10. 6-10 Inventory Control Perpetual Inventory System Can Estimate Shrinkage Periodic Inventory System No Up-to-Date Records Can’t Estimate Shrinkage Continuous Tracking

11. 6-11 Learning Objective 6-3 Analyze purchase transactions under a perpetual inventory system.

12. 6-12 Recording Inventory Purchases We will now look at the accounting for inventory purchases, as well as transportation costs, purchase returns and allowances, and purchase discounts. We will record all inventory- related transactions in the Inventory account.

13. 6-13 Inventory Purchases Walmart receives $10,500 of bikes purchased on account. 1 Analyze Liabilities Assets = Stockholders’ Equity + Inventory +$10,500Accounts Payable +$10,500 2 Record Inventory Accounts Payable 10,500

14. 6-14 Transportation Cost Walmart pays $400 cash to a trucker who delivers the $10,500 of bikes to one of its stores. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -$400 Inventory +$400 2 Record Inventory Cash 400

15. 6-15 Purchase Returns and Allowances Walmart returned some of the bikes to the supplier and received a $500 reduction in the balance owed. 1 Analyze Liabilities Assets = Stockholders’ Equity + Inventory -$500Accounts Payable -$500 2 Record Accounts Payable Inventory 500

16. 6-16 Purchase Discounts Walmart’s bike purchase for $10,500 had terms of 2/10, n/30. Recall that Walmart returned inventory costing $500 and received a $500 reduction in its Accounts Payable. Walmart paid within the discount period. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -$9,800 Inventory -$200 Accounts Payable -$10,000 2 Record Accounts Payable Cash Inventory 9,800 200 10,000

17. 6-17 Summary of Inventory Transactions

18. 6-18 Learning Objective 6-4 Analyze sales transactions under a perpetual inventory system.

19. 6-19 Recording Inventory Sales Merchandisers earn revenues by transferring control of merchandise to a customer, either for cash or on credit. For a merchandiser who is shipping goods to a customer, the transfer of control occurs at one of two possible times: 1. FOB shipping point —the sale is recorded when the goods leave the seller’s shipping department. 2. FOB destination —the sale is recorded when the goods reach their destination (the customer).

20. 6-20 Recording Inventory Sales Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system. Selling Price Cost

21. 6-21 Recording Inventory Sales Walmart sells two Schwinn mountain bikes at a selling price of $200 per bike, for a total of $400 cash. The bikes had previously been recorded in Walmart’s Inventory at a cost of $175 per bike, for a total cost of $350. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +$400 Inventory -$350 Sales Revenue +$400 Cost of Goods Sold -$350 2 Record Cash Sales Revenue Cost of Goods Sold Inventory 400 350 400 350

22. 6-22 Sales Returns and Allowances When goods sold to a customer arrive in damaged condition or are otherwise unsatisfactory, the customer can (1) return them for a full refund or (2) keep them and ask for a reduction in the selling price, called an allowance.

23. 6-23 Sales Returns and Allowances Suppose that after Walmart sold the two Schwinn mountain bikes, the customer returned one to Walmart. Assuming that the bike is still like new, Walmart would refund the $200 selling price to the customer and take the bike back into inventory. 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash -$200 Inventory +$175 Sales Returns and Allowances (+xR) -$200 Cost of Goods Sold +$175 2 Record Sales Returns & Allowances (+xR) Cash Inventory Cost of Goods Sold 200 175 200 175

24. 6-24 Sales on Account and Sales Discounts Suppose Walmart’s warehouse store (Sam’s Club) sells printer paper on account to a local business for $1,000 with payment terms of 2/10, n/30. The paper had cost Sam’s Club $700. 2 Record Accounts Receivable Sales Revenue Cost of Goods Sold Inventory 1,000 700 1,000 700 1 Analyze Liabilities Assets = Stockholders’ Equity + Accounts Receivable+$1,000 Inventory -$700 Sales Revenue +$1,000 Cost of Goods Sold -$700

25. 6-25 2 Record Cash Sales Discounts (+xR) Accounts Receivable 1,000 980 20 Sales on Account and Sales Discounts To take advantage of this 2% discount, the customer must pay Walmart within 10 days. If the customer does so, it will deduct the $20 discount (2% $1,000) from the total owed ($1,000), and then pay $980 to Walmart. (2% × $1,000) 1 Analyze Liabilities Assets = Stockholders’ Equity + Cash +$980 Accounts Receivable -$1,000 Sales Discounts (+xR) -$20

26. 6-26 Summary of Sales-Related Transactions The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.

27. 6-27 Learning Objective 6-5 Prepare and analyze a merchandiser’s multistep income statement.

28. 6-28 Multistep Income Statement

29. 6-29 Gross Profit Analysis Gross Profit % = Gross Profit Net Sales × 100

30. 6-30 Comparing Gross Profit Percentages

31. Copyright © 2016 by McGraw-Hill Education Supplement 6A Recording Inventory Transactions in a Periodic System

32. 6-32 Learning Objective 6-S1 Record inventory transactions in a periodic system.

33. 6-33 Recording Inventory Transactions in a Periodic System An electronics retailer stocks and sells just one item and the following events occurred: We will record these events assuming the company uses a periodic inventory system and then compare the periodic inventory system to a perpetual inventory system.

34. 6-34 Recording Inventory Transactions in a Periodic System Periodic Inventory SystemPerpetual Inventory System

35. 6-35 Recording Inventory Transactions in a Periodic System Periodic Inventory System BI + P – EI = CGS End-of-year adjustment entries are not required using a perpetual inventory system.

36. 6-36 Recording Inventory Transactions in a Periodic System Summary of the Effects on the Accounting Equation

37. 6-37 End of Chapter 6