Presentation on theme: "Financial Accounting, Seventh Edition"— Presentation transcript:
1 Financial Accounting, Seventh Edition Chapter 5Accounting for Merchandising Operations
2 Service ActivitiesService organizations provide a service to earn revenue.Examples: Google, Verizon, Fox, Marriott, ESPN.RevenuesExpensesMinusNet incomeEqualsHow has the NETFLIX business model changed over time?
3 Merchandising Operations Merchandising CompaniesBuy and Sell GoodsWholesalerRetailerConsumerThe primary source of revenues is referred to as sales revenue or sales.
4 Merchandising Operations Income MeasurementSalesRevenueNot used in a Service business.LessCost ofGoods SoldGrossProfitEqualsLessOperatingIncome(Loss)OperatingExpensesEqualsCost of goods sold (an Expense) is the total cost of merchandise sold during the period.
5 Reporting Income of Merchandising Company WAL-MART STORES, Inc.Consolidated Statement of IncomeFor the year ended January 31, 2012(all amounts in millions)
6 Reporting Income of Merchandising Company BEST BUY COMPANY, Inc.Consolidated Statement of IncomeFor the year ended March 3, 2012(all amounts in millions of dollars)
8 Knowledge Check Question: In its income statement, a company reported operating expenses of $157,000. Determine sales and gross profit given cost of goods sold was $544,000 and operating loss was $41,000.Sales: $660,000; Gross Profit: $503,000.Sales: $742,000; Gross Profit: $198,000.Sales: $742,000; Gross Profit: $585,000.Sales: $660,000; Gross Profit: $116,000.
9 Merchandising Operations Flow of CostsPerpetual SystemPurchases increase Merchandise Inventory.Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory.Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale.Physical count done to verify Merchandise Inventory balance.The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold.
10 Merchandising Operations Cost of Beginning inventoryNet cost of purchases+=Cost of goods available for saleCost of EndinginventoryCost of goods sold+
11 Knowledge Check: A company’s cost of goods sold was $345,000 Knowledge Check: A company’s cost of goods sold was $345,000. Determine net cost of purchases and cost of ending inventory, given cost of goods available for sale were $595,000 and cost of beginning inventory was $120,000. Net Cost of Purchases Cost of Ending Inventory$475,000 $250,000$250,000 $475,000$475,000 $225,000$250,000 $225,000
12 Merchandising Operations Flow of CostsPeriodic SystemPurchases of merchandise increase Purchases.Ending Inventory determined by physical count.Calculation of Cost of Goods Sold:Beginning inventory $ 100,000Add: Purchases, net 800,000Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000
13 Invoice date Purchaser Order number Credit terms SellerInvoice date PurchaserOrder number Credit termsFreight terms GoodsInvoice amountThis is an example of an invoice that would support the purchase of merchandise inventory. Notice all the different information on the invoice such as the seller, purchaser, credit terms, items purchased, and amount of the purchase.The invoice helps provide much of the information needed when recording the entry to purchase inventory.4-13
14 Recording Purchases of Merchandise On February 1, Wally Mart purchased $10,000 of Merchandise inventory, on account (terms: 2/10, n 30).
15 Recording Transportation Costs SellerBuyerMerchandiseFOB shipping point(buyer pays freight costs)FOB destination(seller pays freight costs)
16 Recording Purchase of Merchandise along with Transportation Costs On February 1, Wally Mart purchased merchandise inventory (fob shipping point), and paid $600 transportation costs in cash.
17 Recording Purchase Returns of Merchandise Purchase Returns and AllowancesPurchaser may be dissatisfied because goods are damaged or defective, of inferior quality, or do not meet specifications.Purchase ReturnPurchase AllowanceReturn goods for credit if the sale was made on credit, or for a cash refund if the purchase was for cash.May choose to keep the merchandise if the seller will grant an allowance (deduction) from the purchase price.
18 Recording Purchase Returns of Merchandise On February 4, Wally Mart returned $1,000 of defective merchandise to the supplier.
19 Recording Purchase Discounts A deduction from the invoice price granted to induce early payment of the amount due.Advantages:Purchaser saves money.Seller shortens the operating cycle.2/10,n/30Discount PercentNumber of Days Discount Is AvailableOtherwise, Net (or All) Is DueCredit Period
20 Recording Purchases of Merchandise Purchase Discount Terms2/10, n/301/10 EOMn/10 EOM2% 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.
21 Recording Payments, net of Returns and Discounts On February 10, the last day of the discount period, Wally Mart paid the balance due for the Feb 1 purchase. Prepare the journal entry for payment.
22 Recording Payments without discount If Wally Mart failed to take the discount, and instead made full payment on February 15, the journal entry would be:
23 A credit to merchandise inventory for $700. Knowledge Check: Tony Company purchased $8,500 of merchandise on September 25 on terms of 1/10, n30. On September 27, Tony returned defective merchandise worth $700, and received full credit. The invoice was paid in full on September 30. Tony’s journal entry on September 30 will include:A credit to merchandise inventory for $700.A debit to accounts payable for $7,800.A credit to cash for $8,415A credit to Merchandise Inventory for $85.
24 Recording Sales of Merchandise Made for cash or credit (on account).Normally recorded when earned, usually when goods transfer from seller to buyer.Sales invoice should support each credit sale.Two Journal Entries to Record a Sale:Cash or Accounts receivable XXXSelling Price#1Sales XXXCost of goods sold XXXCost#2Merchandise inventory XXX
25 Recording Sales of Merchandise On February 11, Wally Mart sold $1,000 of merchandise on account. The merchandise was carried in inventory at a cost of $700. Credit Terms were 3/10, n 30.
26 Recording Returns of Merchandise Sold On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the goods were NOT defective.Sales Returns and Allowances is a contra revenue account.
27 Recording returns of Merchandise Sold Sales Returns and AllowancesContra-revenue account (debit).Sales not reduced (debited) because:would obscure importance of sales returns and allowances as a percentage of sales.could distort comparisons between total sales in different accounting periods.
28 Recording Returns of Merchandise Sold On February 13, a customer returned merchandise with a sales price of $300 and a cost of $210 to Wally Mart . The return is related to the Feb 11 sale. Assume the returned goods were defective, and had a scrap value of $50. The journal entry would be:
29 Cash Receipts, net of Returns and Discounts On February 17, Wally Mart received the net amount owed from the sale of Feb 11.Sales Discounts is a contra revenue account.
30 Knowledge Check: On July 26, Tyler Company makes a sale for $500 to Pauli Company. The cost of the merchandise sold was $300. On August 1, Pauli Company returned the merchandise, which is not defective, and is restored back to the inventory. What is the effect of the August 1 transaction on Total assets and Equity for Tyler Company?Total assets increase $300;Equity increases $300.Total assets decrease $500; Equity decreases $500.Total assets decrease $200; Equity decreases $200.Total assets increase $200; Equity increases $200.
31 Completing the Accounting Cycle Adjusting EntriesGenerally the same as a service company.One additional adjustment to make the records agree with the actual inventory on hand.Involves adjusting Merchandise Inventory and Cost of Goods Sold.
32 Adjusting Entry for Shrinkage At the end of accounting period, Wally Mart’s Inventory Account shows an unadjusted balance of $15,000, but a physical count shows that only $14,300 of inventory on hand.Determine the adjusting entry for Shrinkage.
33 Forms of Financial Statements Multiple-Step Income StatementShows several steps in determining net income.Two steps relate to principal operating activities.Distinguishes between operating and non-operating activities.
34 Multiple-Step Income Statement Income Statement Presentation of Sales
36 Forms of Financial Statements Illustration 5-13Forms of Financial StatementsMultiple-StepKey Items:Net salesGross profitOperating expenses
37 Forms of Financial Statements Illustration 5-13Forms of Financial StatementsKey Items:Net salesGross profitOperating expensesNonoperating activitiesNet income
38 Forms of Financial Statements Single-Step Income StatementSubtract total expenses from total revenuesTwo reasons for using the single-step format:Company does not realize any type of profit until total revenues exceed total expenses.Format is simpler and easier to read.
39 Forms of Financial Statements Illustration 5-14Single-Step
40 Forms of Financial Statements Classified Balance SheetIllustration 5-15
41 End of Chapter 5 “If You Always Do What You Always Did, You Always Get What You Always Got.”W. Edward Deming