1. Supply Chain
Logistics: management of the flow of things between the point of origin and the point of consumption to meet requirements of customers or corporations.
The resources managed in logistics can include physical items such as food, materials, animals, equipment, and liquids; as well as abstract items, such as time and information.
The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing.

2. Retailer … Reseller Merchandising Companies
Buy and Sell Merchandise (Mdse also called “Goods”)
Retailer … Reseller
Manufacturer
Wholesaler
Retailer
Consumer
The primary source of revenues called: Sales Revenue … or ... Sales.

3. Operating Cycles
Operating Cycle: average period of time required for a business to buy (or make) the mdse, sell the mdse, and receive payments from customers for the mdse.
Oper. cycle of mdse company (retailer) usually longer than service company (auto repair).
* mdse = merchandise

4. Flow of Costs
Companies use either a perpetual inventory system or a periodic inventory system to account for inventory. (Instructors note: we are only concerned with perpetual inventory systems – NOT periodic inventory).

5. Flow of Costs PERPETUAL SYSTEM
Maintain detailed records of the cost of each inventory purchase and sale (using a computerized system often relying on bar codes and scanners – Vons, Smiths, Wal-Mart).
Records continuously show inventory that should be on hand for every item.
Company determines cost of goods sold each time a sale occurs.

6. Flow of Costs PERIODIC SYSTEM – (FYI only)
Do not keep detailed records of the goods on hand.
Cost of goods sold determined by count at the end of the accounting period.
Calculation of Cost of Goods Sold:
Beginning inventory $ 100,000
Add: Purchases, net 800,000
Goods available for sale 900,000
Less: Ending inventory 125,000
Cost of goods sold $ 775,000

7. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement Presentation of Sales

8. Income Measurement Gross Profit Net Profit Sales Revenue Cost of
Cost of goods sold (COGS): total cost of merchandise sold during the period.
MINUS
Cost of
Goods Sold
Gross Profit: profit BEFORE all other expenses (rent, salaries, utilities etc). When expressed as a % it is referred to as “Gross Margin” or just “Margin”.
Gross
Profit
MINUS
Operating
Expenses
Operating Expenses: salaries, rent, deprec, utilities, etc … (anything NOT a cost of the actual mdse available for sale)
Net Profit
also called Net Income
(or Net Loss)

9. Merchandising Income Measurement

10. Total Sales
- Sales Returns
- Sales Allowances
Net Sales
“CGS” is your cost of the “goods” (mdse inventory) sold during the period.
Gross Profit is what a business earns from selling inventory … before … subtracting selling, general and administrative expenses.

12. Purchase (Buying) Inventory
“Buyer” … issues a “Purchase Order” (a P.O.) ordering mdse inventory items from a “Seller” … (Seller = Vendor = Supplier)
“Seller” … ships the mdse to “buyer” … (customer)
“Seller” … sends invoice (a bill) to “buyer” (customer).
“Buyer” … receives the mdse inventory from “seller”.
“Buyer” … processes payment to “seller” for the mdse inventory.

13. Recording Purchases of Merchandise
Buyer (Sauk) received a bill (invoice) from the Seller (PW Audio)
Buyers (Sauk) journal entry
May 4
Inventory
3,800
Accts Payable

14. Buyers Accounting Records Buyers “Books”
May 4
Inventory
3,800
Accts Payable
3,800
3,800

16. Indicates who is paying the shipping costs (freight) … AND … who has ownership of mdse while “in transit” (being shipped)

17. Buyer pays freight costs. Included as part of the Inventory cost
Freight Costs – Terms of Sale
Same could be stated as: FOB origin, FOB Dallas
Buyer pays freight costs Included as part of the Inventory cost
Ex: Terms showed “FOB Shipping Point”. Buyer (Sauk) pays freight.
Assume upon delivery of the goods on May 6, Buyer pays FedEx $150 for freight charges, the entry on Buyers books is:

18. Buyers “Books” Inventory 150 3,800 Original 3,800 150 Cash Cash May 6
Freight
Cash
150

19. Seller pays freight costs.
Buyers “Books”
Freight Costs – Terms of Sale
Could be: FOB Las Vegas
Seller pays freight costs.
No Additional Entry on the Buyers (Sauk) books

21. Return mdse for credit, or a cash refund.
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.
Purchase Return
Purchase Allowance
Return mdse for credit, or a cash refund.
Keeps mdse if price reduced (an allowance is a reduction to the purchase price).

22. Recording Return of Merchandise
Buyers “Books”
Recording Return of Merchandise
Ex: May 8 … Buyer (Sauk) returns mdse costing $300.
May 8
Accts Payable
300
Inventory

23. Buyers “Books” Accts Payable 300 Original 3,800 3,800 300 Return 300
May 8
Accts Payable
300
Inventory
Original 3,800
3,800
Freight
300 Return
300

24. Buyer PAYS in full Accts Payable 3,500 Cash 3,800 Original 3,800 300
May 14
Accts Payable
3,500
Cash
3,800
Original ,800
300
Freight
Pymt 3,500
300 return
Cash
3,500 Pymt

26. Ex: Credit terms may read 2/10, n/30.
Buyers “Books”
Credit terms may allow buyer to take a cash discount for “ prompt / early ” payment.
2 = % of discount
10 = # days for discount
Ex: Credit terms may read 2/10, n/30.
n = “net” full payment
30 = due date

27. Buyers “Books” Accts Payable 3,500 70 3,430
Ex: Assume Buyer (Sauk) pays, on May 14, the balance due of $3,500 (invoice price of $3,800 - purchase return of $300). Prepare the entry for Buyer (Sauk) payment on May 14 … taking the 2% discount.
(Discount = $3,500 x 2% = $70)
(3,500 x = $70)
No … No … No (3,500 x .2 = $700)
May 14
Accts Payable
3,500
Inventory 70
Cash
3,430

28. Buyers “Books” Accts Payable 3,500 70 3,430 3,800 3,800 300 3,500
May 14
Accts Payable
3,500
Inventory 70
Cash
3,430
3,800
3,800
300
Freight 150
3,500
300 return
70 discount
Cash
“Cost” of my inventory is: 3, = 3,580
3,430

29. NO NO NO Buyers “Books” Accts Payable 3,500 70 3,430 3,800 3,800 300
May 14
Accts Payable
3,500
Purchase Discounts 70
Cash
3,430 NO NO NO
3,800
3,800
Freight 150
300
300 return
3,500
NO - Periodic Inv System ONLY
Cash
Purchase Discounts 70
3,430

30. Inventory “Credit Terms”
1/10 EOM
n/10 EOM
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.
Net amount due within the first 10 days of the next month.
Note that the “Purchase Discounts” account only exists when using periodic inventory system)

32. Recording Sales of Merchandise
Sellers “Books”
Recording Sales of Merchandise
Sale is made for: Cash … Acct Pybl.
Normally recorded when earned, usually when goods ship from seller.
Sales invoice (bill) should support each sale.

33. Sellers “Books”
Ex: Assume Seller (PW) records May 4 sale of $3,800 as follows. (Assume the merchandise cost PW Audio $2,400).
Accounts Receivable ,800
May 4
Sales Revenue 3,800
This entry records the actual sale to the buyer
Cost of Goods Sold 2,400
May 4
Inventory ,400
This entry records a reduction in sellers inventory as well as the “Cost of Goods Sold”
BOTH entries are required for the seller. (Buyer makes one entry debiting INVENTORY and crediting CASH or ACC PYBL)

34. Accts Receivable 3,800 Cost of Goods Sold 2,400 Accounts Receivable
May 4
Accts Receivable
3,800
Sales (Revenue)
May
Cost of Goods Sold
2,400
Inventory
Accounts Receivable
Sales
3,800
3,800
Cost of Goods Sold
Inventory
2,400
2,400

35. Sales Returns and Allowances
Sellers “Books”
Sales Returns and Allowances
“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.

36. Sellers “Books” Sales Returns & Allow 300 Inventory 140
Illustration: Sellers entry to record returned goods that had a $300 selling price (assume a $140 cost).
* Assume the goods were not defective.
Use a Contra-Revenue acct vs “Sales” … why?
May 8
Sales Returns & Allow
300
Accts Receivable
May
Inventory
140
Cost of Goods Sold

37. Sales Returns & Allow 300 Cost of Goods Sold 140 Accounts Receivable
May 8
Sales Returns & Allow
300
Accts Receivable
Records the return and issuing “a credit” to the buyer
May
Cost of Goods Sold
140
Inventory
Records the return to inventory and the “reversal” of Cost of Goods Sold charge … decreasing the expense.
Accounts Receivable
Sales
3,800
300
3,800
COST OF GOODS SOLD
Sales Return & Allowances
140
300
INVENTORY
140

38. Sellers “Books” Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).

39. Sellers “Books” * [($3,800 – $300) x 2% = $70] Cash 3,430 70 3,500
Ex: On May 14, Seller receives payment of $3,500 LESS the 2% discount (taken by the buyer) and journalizes:
* [($3,800 – $300) x 2% = $70]
May 14
Cash
3,430
Sales Discounts 70
Accts Receivable
3,500

40. Cash 3,430 70 3,500 Sales Accounts Receivable 3,800 3,800 300
May 14
Cash
3,430
Sales Discounts 70
Accts Receivable
3,500
Sales
Accounts Receivable
3,800
3,800
300
Sales Return & Allowances
3,500
300
Cash
Sales Discounts
3,430 70
“Net Sales” = 3,800 – 300 – 70 = 3,430

42. Forms of Financial Statements
Multiple-Step Income Statement
Shows several steps in determining net income.
Two steps relate to principal operating activities.
Distinguishes between operating and non-operating activities.

43. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement Presentation of Sales

44. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement
Key Items:
Net sales

45. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement
Key Items:
Net sales
Gross profit

46. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement
Key Items:
Net sales
Gross profit
Gross profit rate

47. For the Year Ended December 31, 2014
Financial Statements
PW Audio Supply, Inc.
Income Statement
For the Year Ended December 31, 2014
Illustration 5-13
Illustration 5-13
Income Statement
Key Items:
Net sales
Gross profit
Operating expenses
Nonoperating activities
Net income

48. Single-Step Income Statement
Subtract total expenses from total revenues
Two reasons for using the single-step format:
Company does not realize any profit until total revenues exceed total expenses.
Format is simpler and easier to read.

49. Single-Step Income Statement
Illustration 5-15