1. PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. Chapter 05 A CCOUNTING FOR M ERCHANDISING O PERATIONS

2. 5 - 2 Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services Service organizations sell time to earn revenue. Examples: Accounting firms, law firms and plumbing services S ERVICE C OMPANIES C 1

3. 5 - 3 ManufacturerWholesalerRetailerConsumers Merchandising Companies M ERCHANDISER C 1

4. 5 - 4 R EPORTING I NCOME FOR A M ERCHANDISER products Merchandising companies sell products to earn revenue. Examples: sporting goods, clothing, and auto parts stores C 1

5. 5 - 5 O PERATING C YCLE FOR A M ERCHANDISER Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise. C 2

6. 5 - 6 I NVENTORY S YSTEMS C 2

7. 5 - 7  Perpetual systems  continually update accounting records for merchandising transactions  Periodic systems  accounting records relating to merchandise transactions are updated only at the end of the accounting period C 2 I NVENTORY S YSTEMS

8. 5 - 8 M ERCHANDISE P URCHASES On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash. P1

9. 5 - 9 T RADE D ISCOUNTS Used by manufacturers and wholesalers to offer better prices for greater quantities purchased. Example Z-Mart offers a 30% trade discount for orders of 1,000 units or more on its popular product Racer. Each Racer has a list price of $5.25. Example Z-Mart offers a 30% trade discount for orders of 1,000 units or more on its popular product Racer. Each Racer has a list price of $5.25. P1

10. 5 - 10 P1 A CCOUNTING FOR M ERCHANDISE P URCHASES

11. 5 - 11 P URCHASE D ISCOUNTS A deduction from the invoice price granted to induce early payment of the amount due. A deduction from the invoice price granted to induce early payment of the amount due. P1

12. 5 - 122/10,n/302/10,n/30 Discount Percent Number of Days Discount Is Available Otherwise, Net (or All) Is Due in 30 Days Credit Period P URCHASE D ISCOUNTS P1

13. 5 - 13 On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit terms are 2/10, n/30. P URCHASE D ISCOUNTS P1

14. 5 - 14 On November 12, Z-Mart paid the amount due on the purchase of November 2. On November 12, Z-Mart paid the amount due on the purchase of November 2. P URCHASE D ISCOUNTS P1

15. 5 - 15 P URCHASE D ISCOUNTS After we post these entries, the accounts involved look like these: After we post these entries, the accounts involved look like these: P1

16. 5 - 16 P URCHASE R ETURNS AND A LLOWANCES Purchase Return... Merchandise returned by the purchaser to the supplier. Merchandise returned by the purchaser to the supplier. Purchase Allowance... A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. Purchase Return... Merchandise returned by the purchaser to the supplier. Merchandise returned by the purchaser to the supplier. Purchase Allowance... A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier. P1

17. 5 - 17 On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from Trex for defective merchandise. P URCHASE R ETURNS AND A LLOWANCES P1

18. 5 - 18 Z Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes the 2% discount only on the $900 remaining balance. P URCHASE R ETURNS AND A LLOWANCES P1

19. 5 - 19 T RANSPORTATION C OSTS AND O WNERSHIP T RANSFER P1

20. 5 - 20 T RANSPORTATION C OSTS Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is $75. P1

21. 5 - 21 A CCOUNTING FOR M ERCHANDISE P1

22. 5 - 22 A CCOUNTING FOR M ERCHANDISE S ALES P2

23. 5 - 23 S ALES OF M ERCHANDISE P2 Each sales transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer. Recognition of the cost of merchandise sold to a customer.

24. 5 - 24 On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of $1,600. S ALES OF M ERCHANDISE P2

25. 5 - 25 S ALES D ISCOUNTS P2 Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future collection efforts.

26. 5 - 26 Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60. S ALES D ISCOUNTS P2 The account was paid in full within the 60-day period.The account was paid in full within the 10-day discount period.

27. 5 - 27 S ALES R ETURNS AND A LLOWANCES P2 Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales. Sales returns refer to merchandise that customers return to the seller after a sale. Sales allowances refer to reductions in the selling price of merchandise sold to customers.

28. 5 - 28 Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items sell for $800 and cost $600. S ALES R ETURNS AND A LLOWANCES P2

29. 5 - 29 Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction. S ALES A LLOWANCES P2

30. 5 - 30 M ERCHANDISING C OST F LOW IN THE A CCOUNTING C YCLE Beginning inventory Net purchases Merchandise available for sale Ending inventory Cost of goods sold To Income Statement To Balance Sheet To Income Statement To Balance Sheet Period 1 Beginning inventory Net purchases Merchandise available for sale Ending inventory Cost of goods sold Period 2 P2

31. 5 - 31 A DJUSTING E NTRIES FOR M ERCHANDISERS Z-Mart’s Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists. P3 A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration.

32. 5 - 32 C LOSING E NTRIES FOR M ERCHANDISERS P3

33. 5 - 33 P4 A multiple-step income statement format shows detailed computations of net sales and other costs and expenses, and reports subtotals for various classes of items.

34. 5 - 34 S INGLE -S TEP I NCOME S TATEMENT P4

35. 5 - 35 C LASSIFIED B ALANCE S HEET Highly Liquid Less Liquid

36. 5 - 36 G LOBAL V IEW Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales. Financial Statement Differences 1.Order of expenses 2.Separate disclosures 3.Presentation of expenses 4.Classification of operating and nonoperating expenses 5.Alternative measures of income 6.Order of current and noncurrent items on the balance sheet

37. 5 - 37 A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future. = Quick Assets Quick Assets Current Liabilities Acid-TestRatio Acid-TestRatio = Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current Liabilities Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current Liabilities A CID -T EST R ATIO A1

38. 5 - 38 Percentage of dollar sales available to cover expenses and provide a profit. G ROSS M ARGIN R ATIO A2

39. 5 - 39 JCP ENNEY A1/A2

40. 5 - 40 A PPENDIX 5A: P ERIODIC I NVENTORY S YSTEM P5 A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold. (a) (b) (c) (d) (e) (f) (g)

41. 5 - 41 A PPENDIX 5A: P ERIODIC I NVENTORY S YSTEM P5

42. 5 - 42 A PPENDIX 5B: W ORKSHEET —P ERPETUAL S YSTEM P5

43. 5 - 43 END OF CHAPTER 05