1. Accounting for Merchandising Businesses
Chapter 4
T.Hend Alajaji

2. Objectives : Nature of Businesses .
Special terms of Merchandising businesses .
Analysis of merchandising transactions.
Multiple-Step Income Statement

3. Ch4 Merchandising businesses Service businesses compute Net income
Selas Revenues
Cost of goods Sold
Gross Profit
Merchandising Inventory
Analyze Merchandising transactions

4. :Objective 1 . Nature of Businesses
Service Businesses provide services rather than products to customers.
Merchandising businesses sell products they purchase from other business to customers.

6. Operating expenses –XXX Net income $XXX
: Objective 1 . Nature of Businesses
Service Business
Fees earned $XXX
Operating expenses –XXX
Net income $XXX
A service company sells its services

7. Merchandising Business
:Objective 1 . Nature of Businesses
Merchandising Business
Sales $XXX
Cost of Merchandise Sold –XXX
Gross Profit $XXX
Operating Expenses –XXX
Net Income $XXX
A merchandising company, the subject of this chapter, sells products to customers

8. Compute the net income Service business:
Fees earned – operating expenses = net income
Merchandise business:
Sales – cost of merchandise sold = gross profit
Gross profit – operating expenses = net income

9. Income Statement Comparison
Service Business
Fees earned $150,000
Operating expenses(-) 120,000
Net income $ 30,000
Merchandising Business
Sales revenue $600,000
Cost of mdse. Sold ,000
Gross profit $150,000
Operating expenses ,000
Net income $ 30,000

10. Objective 2 . Special terms of Merchandising businesses
sales revenue or sales :
the amount that a business earns from selling merchandise inventory is called sales revenue, or sales.
cost of merchandise sold :
the major expense of a merchandiser is cost of goods sold.
Gross margin or Gross profit :
The excess of sales over cost of sales is called gross margin.
Merchandise inventory
Merchandise on hand at the end of an account period

11. Analyze Merchandising transactions
Objective 3
Analyze Merchandising transactions

12. 1- Sales Transactions
Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system.
Selling Price
Part I
Every merchandise sale has two components, each of which requires an entry in a perpetual inventory system.
Part II
Selling price. Wal-Mart’s sales price is recorded as an increase in Sales Revenue and a corresponding increase in either Cash (for a cash sale) or Accounts Receivable (for a credit sale).
Part III
Cost. The cost that Wal-Mart incurred to initially buy the merchandise is removed from Inventory and reported as an expense called Cost of Goods Sold (CGS).
Cost
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13. 1- Sales Transactions
On January 3, NetSolutions sold $1,800 of merchandise for cash.
Using the perpetual inventory system, the cost of merchandise sold and the decrease in merchandise inventory are also recorded. The cost of merchandise sold on January 3 is $1,200
Date
Description
Debit
Credit
Jan. 3
Cash
Sales
1,800
Cost of merchandise sold
Merchandise inventory
1,200

14. 1- Sales Transactions
On January 12, NetSolutions sold merchandise on account for $510. The cost of merchandise sold was $280.
Date
Description
Debit
Credit
Jan. 12
Account receivable
Sales
510
Cost of merchandise sold
Merchandise inventory
280

15. 2- 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.
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. These sales returns and allowances require Wal-Mart to revise the previously recorded sale and, in the case of returns, to revise the previously recorded inventory reduction and cost of goods sold.

16. 2- Sales Returns and Allowances
On January 13, issued Credit Memo No. 32 to Alsaud Company for merchandise returned to NetSolutions. Selling price, $225; cost to NetSolutions, $140.
Date
Description
Debit
Credit
Jan. 13
Sales returns and allowances
Account receivable – Krier Co.
225
Merchandise inventory
Cost of merchandise sold
140

17. 3- Sales on Account and Sales Discounts
A sales discount is a sales price reduction given to customers for prompt payment of their account balance.
When a merchandiser makes a sale on account, it gives up its inventory but receives only a promise of being paid cash later. To encourage customers to make these payments promptly, a merchandiser often specifies payment terms such as “2/10, n/30.” The “2/10” means that if the customer pays within 10 days of the sale date, a 2 percent sales discount will be deducted from the selling price. The “n/30” part means that if payment is not made within the 10-day discount period, the full amount will be due 30 days after the date of sale.

18. 3- Sales on Account and Sales Discounts
To encourage the buyer to pay before the end of the credit period, the seller may offer a discount, such as 2/10, n/30. These terms indicate that a two percent discount can be taken if the invoice is paid within ten days. After ten days the full amount is due by the thirtieth day from the invoice date
On January 17, NetSolutions receives the amount due within ten days, so the buyer deducted $30 ($1,500 x 2%) from the invoice amount
Date
Description
Debit
Credit
Jan. 22
Cash
Sales discounts
Account receivable
1,470 30
1,500

19. Summary of Sales-Related Transactions
The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts.
The sales returns and allowances and sales discounts introduced in this section were recorded using contra-revenue accounts. This slide summarizes their effects on sales reporting. The documentation procedure involving contra-revenue accounts allows managers to monitor and control how sales discounts, returns, and allowances affect the company’s revenues. For example, frequent returns of defective products would show up as an increase in the Sales Returns and Allowances account. In response to such an increase, Wal-Mart’s managers might decide to discontinue the product or find a new supplier.
Detailed information relating to sales discounts and returns is a key part of a merchandiser’s business operations. To avoid revealing these secrets to competitors, most companies report these contra-accounts only on their internal financial statements. Externally reported income statements almost never include contra-revenue accounts. Instead, externally reported income statements begin with Net Sales.

20. Purchase Transactions
On January 3, NetSolutions purchased merchandise for cash.
On January 4, NetSolutions purchased merchandise on account from Thomas Corporation
Date
Description
Debit
Credit
Jan. 3
Merchandise inventory
Cash
2,510
Jan. 4
Account payable - Thomas Corporation
9,250

21. 2- Purchases Discounts :
Alpha Technologies issues an invoice for $3,000 to NetSolutions dated March 12, with terms 2/10, n/30. NetSolutions is trying to determine if it should pay the invoice within the discount period.
Based on the calculation in the previous slide, NetSolutions pays the amount due, less the discount, on March 22.
Date
Description
Debit
Credit
Mar. 12
Merchandise inventory
Account payable - Alpha Technologies
3,000
Mar. 22
Cash
2,940 60

22. 3- Purchases Returns and Allowances :
NetSolutions receives a delivery from Maxim Systems and determines that $900 of the items are not the merchandise ordered. Debit memorandum #18 is issued to Maxim Systems. NetSolutions records the return of the merchandise as follows:
Date
Description
Debit
Credit
Mar. 7
Account payable - Maxim Systems
Merchandise inventory
900

23. Multiple-Step Income Statement

24. NetSolutions Income Statement For the Year Ended December 31, 2007
Revenue from sales: Sales $720,185 Less:Sales returns and allowances $ 6,140 Sales discounts 5,790 11,930 Net sales $708,255 Cost of merchandise sold 525,305 Gross profit $182,950
Continued

25. Operating expenses: Selling expenses: Sales salaries expense $56,230 Advertising expense 10,860 Depr. Expense–store equipment 3,100 Miscellaneous selling expense 630 Total selling expenses $ 70,820 Administrative expenses: Office salaries expense $21,020 Rent expense 8,100 Depr. expense–office equipment 2,490 Insurance expense 1,910 Office supplies expense 610 Misc. administrative expense 760 Total admin. expenses 34,890 Total operating expenses 105,710 Income from operations $ 77,240
Continued

26. Other income and expenses: Rent revenue $ 600 Interest expense (2,440) (1,840) Net income $75,400
Concluded

27. M6-11 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $50,000 of inventory on hand at the beginning of the month. During the month, the company buys $8,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $25,000 of inventory is on hand. How much shrinkage occurred during the month?
Part I
M6-11 Calculating Shrinkage in a Perpetual Inventory System
Corey’s Campus Store has $50,000 of inventory on hand at the beginning of the month. During the month, the company buys $8,000 of merchandise and sells merchandise that had cost $30,000. At the end of the month, $25,000 of inventory is on hand. How much shrinkage occurred during the month?
Part II
The shrinkage for the month is $3,000 and is calculated as shown on this slide.
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