1. merchandising operations
Chapter 5
Accounting for
merchandising operations
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2. The operations of a merchandising company compared to the operations of a service company.
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3. Merchandising Operations
Merchandising firms buy finish products for resale to a customer.
They do not manufacture the products.
Manufacturers convert raw materials and components into finished products.
Wholesalers buy finished products in large volumes from manufacturers and sell the product in smaller quantities to retailers or sometimes
to other wholesalers.
Retailers typically buy products from wholesalers for sale to the general public.
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4. Merchandising companies
Manufacturer
Wholesaler
Retailer
Consumer
End-User
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5. Operating Cycle of a Merchandising Firm
Three primary steps for merchandising firms:
Purchase of merchandise —inventory (a current asset)
Sale of the merchandise —either Accounts Receivable or cash
Payment received from the customer—cash
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6. Operating Cycle of a Service Firm
Two primary steps for service firms:
Perform a service—accounts receivable but no inventory
Payment from the customer—cash
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7. Merchandising Firm’s Cost Flows
A company begins the year with a certain amount of inventory—Beginning Inventory
Added to this are the additional Cost of Goods Purchased
Together, this makes up the Cost of Goods Available for Sale
From this amount, some of the inventory is sold— Cost of Goods Sold
The remaining amount makes up the Ending Inventory
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8. Cost Flows +
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9. Inventory Systems Perpetual system Periodic system
The cost of merchandise sold is calculated after every sale.
Inventory balance is kept “perpetually” up-to-date.
Provides greatest control over inventory.
Better able to determine theft or spoilage.
Periodic system
Cost of merchandise sold is computed periodically when a physical count of remaining inventory is taken.
Actual balance of inventory is unknown until the periodic count.
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10. Select the correct answer.
Which of the following best describes the flow of inventory costs?
The cost of goods purchased plus beginning inventory is greater than the cost of goods sold plus ending inventory.
The cost of goods purchased plus beginning inventory is less than the cost of goods sold plus ending inventory.
.The cost of goods purchased plus beginning inventory is equal to the cost of goods sold plus ending inventory.
The cost of goods available for sale is equal to ending inventory less beginning inventory.
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11. accounting for purchases of merchandise.
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12. Accounting for Purchases of Merchandise
When the perpetual inventory system is used, a company debits the Inventory account for the acquisition cost. If the purchase is for cash, then the Cash account is credited. If the acquisition is on credit or on account, Accounts Payable is credited. Assume Kali Company purchases 200 cameras for resale for $42,000 on account. The following journal entry records this accounting transaction.
Inventory
42,000
Account payable
To record the purchase of 200 cameras for resale.
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13. Transportation Costs
All costs necessary to get the merchandise ready for resale become part of the inventory cost. If Kali Company pays $200 shipping cost for the cameras, the following journal entry will be made by Kali.
Inventory
200
Cash
To record shipping costs for the 200 cameras.
For this example, assume that the transportation costs were paid by the seller so that the above entry is not needed.
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14. Purchase Returns and Allowances
Purchase returns represent the return of merchandise that is not wanted by the buyer.
Purchase allowances represent a reduction in the purchase price given to the buyer, often to induce the buyer to keep merchandise that is otherwise going to be returned.
Assume Kali decided to return 20 cameras. The cameras cost Kali $210 each.
Accounts payable
4,200
Inventory
To record the return of 20 cameras.
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15. Purchase Discounts
Sellers often provide buyers with incentives to pay their bills earlier than the maximum allowed time period so that the seller would receive cash sooner.
The credit period is the maximum time given for payment, often stated in net terms as n/.
For example, 30 day terms will be stated as n/30
A purchase discount may be given for faster payment. This is often stated as the discount amount and discount period.
For example, a 2 percent discount if paid in 10 days is stated as 2/10
In this example the full terms are 2/10, n/30; this means the buyer can take a 2% discount is paid in 10 days, otherwise the full amount is due in 30 days.
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16. Purchase Discount Example
Assume Kali receives the terms 2/10, n/30 and pays within the 10 day discount period.
The full payment due before discount, after the returns, is $37,800
A 2% discount is $756
The following journal entry would be made by Kali:
Accounts payable
37,800
Inventory
756
Cash
37,044
To record the payment for 180 cameras within the discount period.
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17. Select the correct answer.
The cost of inventory includes each of the following except:
Initial purchase cost
Transportation costs
Purchase returns and allowances
.Sales returns and allowances
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18. Accounting for sales of merchandise.
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19. Accounting for the Sales of Merchandise
Under the perpetual system, two entries (or a compound entry) are needed to record a sale.
The first entry records the sales revenue with a credit (and a debit to either cash or accounts receivable).
The second entry records the reduction of inventory.
The Inventory account is decreased on the balance sheet with a credit (showing the reduction of inventory)
This same amount becomes an expense on the income statement with a debit to the Cost of Goods Sold account.
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20. Accounting for the Sales of Merchandise —An Example—
Assume Kali Company sells, on account, 30 cameras for $500 each. The two necessary entries are:
Note: The cost to Kali of the cameras is
(42,000–4,200–756)/(200-20) = $ each
Accounts receivable
15,000
Sales revenue
To record the sale of 30 cameras.
Cost of goods sold
6,174
Inventory
To record the sale of 30 cameras.
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21. Sales Returns and Allowances and Discounts
The recording by the seller for returns, allowances, and discounts sort of mirror those made by the buyer. The seller uses the “Sales returns and allowance” account.
For example, if Kali had 5 cameras returned from the previous sale, the following entry would be made:
Sales returns and allowances
2,500
Accounts receivable
To record the return of 5 cameras.
Inventory
1,029
Cost of Goods Sold
To record the return of 5 cameras
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22. Net Sales
Sales returns and allowances is a contra account with a normal debit balance. Along with any sales discounts given, these amounts are subtracted from sales revenue to yield net sales.
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23. Select the correct answer.
Included in net sales are each of the following except:
Sales price amounts of the merchandise sold
.Cost of the merchandise sold
Sales returns and allowances
Sales discounts
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24. the gross profit percentage and the return on sales ratio
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25. Gross Profit Percentage=
Gross profit on sales
Net sales
Key metric followed by analysts
Indicates a company’s ability to sell its products at acceptable prices
Kali Company
Income Statement – Partial
For Month of December 2016
Sales
$15,000
Less: Returns
2,500
Net sales
12,500
Cost of goods sold
5,145
Gross profit on sales
$ 7,355
Gross profit percentage =
7,355
= 58.8%
12,500
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26. Return on Sales Ratio
Return on sales ratio =
Net income
Net sales
Reveals the net income (the bottom-line) earned on each dollar of sales.
Subtracts all costs from net sales, not just the cost of goods sold.
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27. Select the correct answer.
Castle Co. reports net income of $100, net sales of $1,000, and cost of goods sold of $600. Which of the following is true of Castle?
Return on sales = 10%; Gross profit percentage = 60%
.Return on sales = 10%; Gross profit percentage = 40%
Return on sales = 90%; Gross profit percentage = 40%
Return on sales = 40%; Gross profit percentage = 10%
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28. Periodic inventory system
Appendix 5A
Periodic inventory system
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29. Periodic Inventory System
Less widely used.
Does not update the Inventory account or the Cost of Goods account as merchandise transactions take place.
Updates are made at the end of the accounting period when a physical count of inventory is made.
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30. Corporate Social Responsibility
An important component of good corporate social responsibility is strong corporate governance.
Corporate governance is the set of policies and processes that determine how a corporation is run.
Corporate governance also includes how a corporation interacts with its many stakeholders, including employees, customers, suppliers, regulators, and the general public.
Many companies, including Target Corporation, publish details on their corporate governance on their websites.
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31. The new revenue recognition standard
Appendix 5B
The new revenue recognition standard
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32. The New Revenue Recognition Standard
FASB and IASB worked together in an effort to create more consistency in revenue recognition.
Goal was to have more consistency across various industries
Core principle—companies should recognize revenue when goods or services are transferred to a customer.
The amount of revenue recognized should reflect the amount expected to be received in the exchange.
The standard will generally be effective for fiscal years beginning after December 15, 2017 for U.S. GAAP.
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33. Changes from the Current Standard
Under the current standard a company records revenue at the gross amount of the sale and then reduces this amount for both sales discounts and sales returns if and when these events occur.
Under the new standard revenue is recorded at the net amount expected to be received.
End-of-period adjusting entries are used to reduce gross amounts recorded to the proper net amount.
Adjustments based on judgments of future sales discounts and sales returns and allowances
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34. End-of-Period Adjustments —An Example—
Assume Kelly Co. sells $200,000 of merchandise on credit with a cost of goods sold of $150,000. These sales will initially be recorded by Kelly Co. as follows:
Various Dates
Accounts receivable
200,000
Sales revenue
To record sale of merchandise on account.
Various Dates
Cost of goods sold
150,000
Inventory
To record cost of goods sold.
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35. Adjusting Journal Entry for Sales Discounts
Kelly Co. offers terms of 2/10, n/30 to encourage early payment. At year-end there are $5,000 of sales eligible for the 2 percent discount. Kelly Co. expects all the companies will pay within the discount period.
Dec. 31
Sales discounts
100
Allowances for sales discounts
To record estimated sales discounts.
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36. Adjusting Journal Entry for Sales Returns and Allowances
Kelly Co. allows a 90-day return privilege. At year-end Kelly Co. estimates there remains $60,000 of sales (with a cost to Kelly Co. of $45,000) that are still within the 90-day return period. Past experience has shown that 15 percent of this merchandise will be returned.
Dec. 31
Sales returns and allowances
9,000
Sales refunds payable
To record estimated merchandise returns.
Dec. 31
Estimated inventory return
6,750
Cost of goods sold
To record estimated merchandise returns.
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37. End-of-Period Adjustments Example continued
In subsequent periods the following accounts will be analyzed:
Allowance for sales discounts
Sales refunds payable
Estimated inventory return
Management will adjust these accounts upward or downward as needed.
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38. © Cambridge Business Publishers