1. 5 Accounting for Merchandise Operations
FINANCIAL ACCOUNTING
2ND EDITION BY
DUCHAC, REEVE, & WARREN
© Copyright 2007 Thomson South-Western, a part of The Thomson Corporation. Thomson, the Star Logo, and South-Western are trademarks used herein under license.

2. LEARNING GOALS
When you finish this chapter, you should be able to

3. LEARNING GOALS Distinguish service business from merchandise business.
Describe, illustrate financial statements of merchandising business.
Describe accounting for sale of merchandise.
Continued

4. LEARNING GOALS Describe accounting for purchase of merchandise.
Describe accounting for transportation costs, sales tax.
Illustrate dual nature of merchandising transactions.
Continued

5. LEARNING GOALS Describe accounting for merchandise shrinkage.
Describe, illustrate effects of inventory misstatements on financial statements.
Describe, illustrate use of gross profit, operating income in analyzing company’s operations.

6. J. C. PENNEY J. C. Penney Adapting to changes by
Providing more assortment, quality than discounters
Better price than specialty stores
Focus on soft goods, eliminate hard goods

7. LEARNING GOALS 1
Distinguish service business from merchandise business.

8. SERVICE VS. MERCHANDISING BUSINESS
LG 1
SERVICE VS. MERCHANDISING BUSINESS
Service firms sell services
Examples:
Family Health Care, PC
H&R Block
Merchandising firms sell products
Must buy products to sell
Gross profit = Net sales – Cost of Goods Sold

9. Service firm income statement
LG 1
EXHIBIT 1
Service firm income statement

10. Merchandising firm income statement
LG 1
EXHIBIT 2
Merchandising firm income statement

11. LEARNING GOALS 2
Describe, illustrate financial statements of merchandising business.

12. INCOME STATEMENT FORMATS
LG 2
INCOME STATEMENT FORMATS
2 income statement formats
Single step
Multi-step

13. MULTI-STEP INCOME STATEMENT
LG 2
MULTI-STEP INCOME STATEMENT
Multi-step
Isolates Cost of Goods Sold
Subtracts CGS from Net sales to get Gross Profit
Continued

14. EXHIBIT 5

15. SINGLE STEP INCOME STATEMENT
LG 2
SINGLE STEP INCOME STATEMENT
Single step
Groups all expenses in major categories
Subtracts total expenses from Net sales
Continued

16. LG 2
EXHIBIT 5

17. OTHER FINANCIAL STATEMENTS: Online Solutions
LG 2
OTHER FINANCIAL STATEMENTS: Online Solutions
Online Solutions also prepares
Retained Earnings Statement
Balance Sheet
Statement of Cash Flows
See financial statements pp
Choice of income statement format does not change other statements

18. INTEGRATED FINANCIAL STATEMENTS
LG 2
INTEGRATED FINANCIAL STATEMENTS
Statement of cash flows linked to cash on balance sheet
Net income from income statement linked to retained earnings statement
Retained earnings linked to balance sheet in stockholders’ equity

19. IFSF: Online Solutions
LG 2
IFSF: Online Solutions

20. LG 2
EXERCISE 5-12a
Determine the missing amounts, a & b.
Sales
Sales returns, allowances
Sales discounts
Net sales
Cost of Merchandise Sold
Gross profit
$393,000
(a)
18,000
350,000
(b)
140,000
Click button to skip this exercise
a = $25,000
Press “Enter” or click left mouse button for answer.

21. LG 2
EXERCISE 5-12b
Determine the missing amounts, a & b.
Sales
Sales returns, allowances
Sales discounts
Net sales
Cost of Merchandise Sold
Gross profit
$393,000
(a)
18,000
350,000
(b)
140,000
Click button to skip this exercise
b = $210,000
Press “Enter” or click left mouse button for answer.

22. LG 2
EXERCISE 5-12c
Determine the missing amounts, a & b.
Sales
Sales returns, allowances
Sales discounts
Net sales
Cost of Merchandise Sold
Gross profit
$500,000
15,000
8,000
(c)
285,000
(d)
Click button to skip this exercise
c = $477,000
Press “Enter” or click left mouse button for answer.

23. LG 2
EXERCISE 5-12d
Determine the missing amounts, a & b.
Sales
Sales returns, allowances
Sales discounts
Net sales
Cost of Merchandise Sold
Gross profit
$500,000
15,000
8,000
(c)
285,000
(d)
Click button to skip this exercise
d = $192,000
Press “Enter” or click left mouse button for answer.

24. LEARNING GOALS 3
Describe accounting for sale of merchandise.

25. ENTRY 1/3: Cash Sale Sold merchandise for cash
LG 3
ENTRY 1/3: Cash Sale
SCF BS IS R
1/3 Cash
Sales
1,800
Sold merchandise for cash
Increases operating cash flow
Increases assets, equity
Increases revenue

26. ENTRY 1/3: CMS Merchandise charged to expense (CMS)
LG 3
ENTRY 1/3: CMS
SCF BS IS E
1/3 Cost of Merc Sold
Inventory
1,200
Merchandise charged to expense (CMS)
Has no effect on cash flow
Decreases assets, equity on balance sheet
Increases expense on income statement

27. ENTRY 1/12: Credit Sale Sale on account, 2/10, n/30
LG 3
ENTRY 1/12: Credit Sale
SCF BS IS R
1/12 Acct Receivable
Sales
1,500
Sale on account, 2/10, n/30
Has no effect on cash flows
Increases assets, equity on balance sheet
Increases revenue on income statement

28. ENTRY 1/12: CMS Charged inventory to expense (CMS)
LG 3
ENTRY 1/12: CMS
SCF BS IS E
1/12 Cost of Mer Sold
Inventory
850
Charged inventory to expense (CMS)
Has no effect on cash flows
Decreases assets, equity on balance sheet
Increases expense on income statement

29. ENTRY 1/22: Discount Received payment within discount period
SCF BS IS R
1/22 Cash
Sales Discount
Acct Receivable
1,470 30
1,500
Received payment within discount period
Increases operating cash flows
Net decrease assets, decreases equity on balance sheet
Decreases revenue on income statement
Click button to skip to purchase entries

30. LG 3
ENTRY 1/13: Sales Returns
SCF BS IS R
1/13 Sales R&A
Acct Receivable
2,000
Accepted sales returns, reduction of receivables
No effect cash flows
Decreases assets, equity on balance sheet
Decreases revenue on income statement

31. ENTRY 1/13: Inventory Returns
LG 3
ENTRY 1/13: Inventory Returns
SCF BS IS E
1/13 Inventory
Cost of Mer Sold
1,200
Returned merchandise put back in inventory
No effect cash flows
Increases assets, equity on balance sheet
Decreases expenses on income statement

32. LEARNING GOALS 4
Describe accounting for purchase of merchandise.

33. ENTRY 1/6: Purchase Purchased inventory on account
LG 4
ENTRY 1/6: Purchase
SCF BS IS
1/6 Inventory
Acct Payable
1,800
Purchased inventory on account
Has no effect on cash flows
Increases assets, liabilities on balance sheet
Has no effect on income statement

34. ENTRY 1/21: Purchase Discounts
LG 4
ENTRY 1/21: Purchase Discounts
SCF BS IS
1/21 Acct Payable
Inventory
Cash
1,800 18
1,782
Paid account within discount period
Decreases operating cash flow
Decreases assets, liabilities on balance sheet
No effect income statement

35. ENTRY 2/5: No Discounts Payment made after discount period
LG 4
ENTRY 2/5: No Discounts
SCF BS IS
2/5 Acct Payable
Cash
1,800
Payment made after discount period
Decreases operating cash flows
Decreases assets, liabilities on balance sheet
No effect on income statement
Click button to skip returns

36. ENTRY 1/19: Returning Inventory
LG 4
ENTRY 1/19: Returning Inventory
SCF BS IS
1/19 Acct Payable
Inventory
5,000
Returning merchandise inventory to vendor
Has no effect on cash flows
Decreases assets, liabilities on balance sheet
Has no effect on income statement

37. LEARNING GOALS 5
Describe accounting for transportation costs, sales taxes.

38. ENTRY 1/19 FOB: Shipping Point
LG 5
ENTRY 1/19 FOB: Shipping Point
1/19 Inventory
Acct Payable
2,900
SCF BS IS
SCF BS IS
1/19 Inventory
Cash
150
Inventory purchased FOB shipping point
Decreases cash flows, operations from payment of shipping costs
Increases assets, liabilities on balance sheet from purchase
No effect income statement
Click button to skip entry

39. ENTRY 1/24: Delivery Costs
LG 5
ENTRY 1/24: Delivery Costs
1/24 Acct Receivable
Sales
4,700
SCF BS IS R
SCF BS IS E
1/24 Cost of Merc Sold
Inventory
2,750
SCF BS IS E
1/24 Transportation costs
Cash
350
Sold and delivered merchandise
Decrease operating cash flows from delivery
Net increase assets, equity on balance sheet
Net increase income on income statement

40. LEARNING GOALS 6
Illustrate dual nature of merchandising transactions.

41. MERCHANDISE TRANSACTIONS
LG 6
MERCHANDISE TRANSACTIONS
Dual nature
Each transaction affects
Buyer
Seller

42. LEARNING GOALS 7
Describe accounting for merchandise shrinkage

43. SHRINKAGE Recorded inventory does not equal physical inventory
LG 7
SHRINKAGE
Recorded inventory does not equal physical inventory
Requires correction

44. ENTRY 12/31: Shrinkage Inventory shrinkage Has no effect on cash flows
LG 7
ENTRY 12/31: Shrinkage
SCF BS IS E
12/31 Cost of Merch Sold
Inventory
1,800
Inventory shrinkage
Has no effect on cash flows
Decreases assets, equity on balance sheet
Increases expenses on expense

45. LEARNING GOALS 8
Describe, illustrate effects of inventory misstatements on financial statements.

46. INVENTORY MISSTATEMENTS
LG 8
INVENTORY MISSTATEMENTS
When inventory is misstated
Income statement effects
Gross profit, net income equally misstated
Balance sheet effects
Total assets equally misstated
Equity equally misstated

47. Effects of inventory misstatements
LG 8
EXHIBIT 12
Income Statement
Physical inventory misstated
Inventory shrinkage misstated
CMS misstated
GP misstated
Net Income misstated
Balance Sheet
Physical inventory misstated
Inventory misstated
Current & Total assets misstated
Retained earningsmisstated
Total equity misstated
Effects of inventory misstatements

48. LEARNING GOALS 9
Describe, illustrate gross profit, operating income to analyze company’s operations.

49. Gross profit/Net Sales
LG 9
GROSS PROFIT RATIO
Gross profit as a percent of sales
Gross profit/Net Sales
For $1 sales, X cents of gross profit, after covering cost of merchandise

50. OPERATING PROFIT RATIO
LG 9
OPERATING PROFIT RATIO
Operating profit as a percent of sales
Operating Income/Net Sales
For $1 sales, X cents of operating profit after covering operating expenses

51. EXHIBIT 13 J.C. PENNEY SAKS Fiscal yr end 2002 2003 2004
LG 9
EXHIBIT 13
J.C. PENNEY
SAKS
Fiscal yr end
2002
2003
2004
GP as % of Sales
38.7%
37.2%
35.9%
37.9%
Op Income as % of Sales
5.5%
3.1%
2.4%
3.0%

52. ANALYSIS For a 3 year period, 2002 – 2004 J.C. Penney vs. Saks, 2004
LG 9
ANALYSIS
For a 3 year period, 2002 – 2004
J.C. Penney increased gross profit
J.C. Penney increased operating profit
J.C. Penney vs. Saks, 2004
J.C. Penney has higher gross profit, higher operating profit than Saks

53. CHAPTER 5
THE END