2. 1 Financial Accounting: Tools for Business Decision Making Kimmel, Weygandt, Kieso, Trenholm KIMMEL

3. 2 Chapter 5 Merchandising Operations After studying Chapter 5, you should be able to: 1.Identify the differences between a service enterprise and a merchandising company. 2.Explain the recording of purchases under a perpetual inventory system. 3.Explain the recording of sales revenues under a perpetual inventory system. 4.Distinguish between a single-step and a multi-step statement of earnings. 5.Explain the factors affecting the profitability.

4. 3 Differences Between Service and Merchandising Companies Service enterprises perform services as their primary source of revenue Merchandising companies buy and sell merchandise

5. 4 +Primary source of revenues is the sale of merchandise +Sales revenue +Expenses for a merchandising company are divided into two categories +Cost of goods sold +Operating expenses Merchandising Company Revenues and Expenses

6. 5 Page 202 in book Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Earnings (Loss) Less Equals Earnings Measurement Process for Merchandiser Illustration 5-1

7. 6 TO Operating Cycle +Average time it takes to go from cash to cash in producing revenues

8. 7 Receive Cash Perform Services Buy Inventory Sell Inventory Service Company Merchandising Company Cash Accounts Receivable Accounts Receivable Merchandise Inventory Illustration 5-2

9. 8 Inventory Systems +Merchandising entities may use either (or both) of the following inventory systems +Perpetual +Periodic

10. 9 Record Revenue and Cost of Goods Sold Compute Cost of Goods Sold Perpetual Periodic Perpetual Item Sold End of Period Comparing Periodic and Perpetual Inventory Systems Inventory Purchased Record Purchase of Inventory End of Period No Entry Illustration 5-3 Record Purchase of Inventory Record Revenue Only Inventory Purchased Item Sold

11. 10 Cost of Merchandise Inventory +All costs of getting the inventory to company and ready to sell +Only costs associated with merchandise purchased for resale- not assets acquired for use, such as supplies

12. 11 1. Seller 2.Invoice date 3.Purchaser 4.Salesperson 5.Credit terms 6.Freight terms 7.Goods sold: catalog no.,description, quantity, price per unit 8.Total invoice price Illustration 5-4

13. 12 Merchandise Purchases On May 4 the company bought $ 3,800 worth of merchandise from PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 4 Merchandise Inventory 3,800 Accounts Payable 3,800 To record goods purchased on account Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800

14. 13 Purchases Returns and Allowances On May 8 the company returned $300 worth of merchandise to PW Audio Supply, Inc. GENERAL JOURNAL Debit Credit May 8 Accounts Payable 300 Merchandise Inventory 300 To record goods returned that were purchased on account Accounts Payable Merchandise Inventory May 4 3,800 Freight-out May 4 3,800May 8 300

15. 14 Freight Costs - On Incoming Inventory

16. 15 Freight Costs - On Incoming Inventory On May 6 the company paid $150 to have the merchandise inventory delivered to them. GENERAL JOURNAL Debit Credit May 6 Merchandise Inventory 150 Cash 150 To record payment of freight. Freight-Out Merchandise Inventory May 4 3,800 Cash May 6 150May 8 300 May 6 150

17. 16 Freight Costs - On Outgoing Inventory

18. 17 Freight Costs-on outgoing inventory On May 6 the seller company paid $150 to have merchandise inventory delivered to the buyer. GENERAL JOURNAL Debit Credit May 6 Freight-Out 150 Cash 150 To record payment of freight on goods sold. Freight-Out Merchandise Inventory Cash May 6 150

19. 18 Purchase Discounts +Credit terms specify the amount of cash discount available to encourage early payment and the time period during which it is offered +2/10,n/30 +1/10 EOM

20. 19 Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period Original invoice $3,800 -Returns 300 Amount due before discount 3,500 2% discount 70 Net due $3,430 Purchase Discounts

21. Company purchased $3,800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period. GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period. Accounts Payable Merchandise Inventory May 4 3,800 Cash May 4 3,800May 8 300 May 14 70 May 14 3,500 May 14 3,430

22. 21 Sales Revenues- Perpetual System +Recorded when earned-revenue recognition principle +Two entries are made for each sale +To record sale +To record cost of merchandise sold

23. Sales - assume a CASH sale of $2,200 for merchandise having a cost of $1,400 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 2,200 May 4 1,400

24. Sales - a ssume a sale of $ 3,800 ON ACCOUNT for merchandise having a cost of $2,400 Cash Accounts Receivable Merchandise Inventory Cost of Goods Sold Sales Returns & Allowances Sales May 4 3,800 May 4 2,400 May 2,400 May 4 3,800

25. 24 Sales Returns and Allowances +Contra revenue account to sales- separate account used contrary to purchase returns and allowances +Used to show how much came in on returns and allowances +Excessive returns and allowances suggest +Errors in billing customers +Mistakes in delivery or shipment of goods

26. 25 Sales Returns and Allowances Flip side of purchase returns and allowance EXCEPT two entries required: one to record return (at sales price) and one to restore goods to inventory, assuming goods resaleable (at cost) On seller’s books GENERAL JOURNAL Debit Credit May 8 Sales Returns and Allowance 300 Accounts Receivable 300 To record return of goods delivered to Sauk Stereo Merchandise Inventory140 Cost of Goods Sold140 To restore returns to inventory

27. 26 Sales Discounts +Contra revenue account to sales- separate account used contrary to purchase discounts +Used to disclose amount of cash discounts taken by customers

28. 27 Sales Discounts Flip side of purchase discounts On buyer’s books GENERAL JOURNAL Debit Credit May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70 To record payment within discount period On seller’s books GENERAL JOURNAL Debit Credit May 14Cash 3,430 Sales Discounts 70 Accounts Receivable 3,500 To record collection within discount period

29. 28 COMPARISON OF SELLER AND BUYER’S ENTRIES SELLER Sale of goods Cash (or receivables) xxx Sales xxx Cost of goods sold xxx Inventory xxx Return of goods Sales returns xxx Cash (or receivables) xxx Inventoryxxx Cost of goods soldxxx BUYER Purchase of goods Inventory xxx Cash (or payables) xxx Return of goods Cash (or receivables)xxx Inventoryxxx

30. 29 COMPARISON OF SELLER AND BUYER’S ENTRIES SELLER Freight (destination) Delivery expense xxx Cash (or payables) xxx BUYER Freight (shipping point) Inventoryxxx Cash (or payables)xxx

31. 30 Two Forms of Statements of Earnings + Single-step statement of earnings + Multiple-step statement of earnings

32. 31 Single-Step Statement of Earnings One step… subtract total expenses from total revenues Revenues $10,000 Expenses 3,000 Net earnings $ 7,000

33. PW AUDIO SUPPLY, Inc. Single-step Statement of Earnings For the Year Ended December 31, 2001 Sales $460,000 Interest Revenue 3,000 Gain on Sale of equipment 600 Total revenues$463,600 Expenses Cost of goods sold$316,000 Selling expenses 76,000 Administrative expenses 38,000 Interest expense 1,800 Casualty loss from vandalism 200 Total expenses 432,000 Earnings before income taxes 31,600 Income tax expense 10,100 Net earnings $ 21,500

34. Sales revenues Sales$ 480,000 Less: Sales returns and allowance$12,000 Sales discounts 8,000 20,000 Net sales 460,000 Cost of goods sold 316,000 Gross profit 144,000Operating expenses Selling expenses Store salaries expense $45,000 Advertising expense 16,000 Amortization expense 8,000 Freight-out 7,000 Total selling expenses$76,000 Administrative expenses Salaries expense $19,000 Utilities expense 17,000 Insurance expense 2,000 Total administrative expenses 38,000 Total operating expenses114,000 Income from operations $ 30,000 PW AUDIO SUPPLY, INC. Multiple-step Statement of Earnings For the Year Ended December 31, 2001

35. Income from operations (continued) $ 30,000 Other revenues and gains Interest revenue $ 3,000 Gain on sale of equipment 600 $ 3,600 Other expenses and losses Interest expense $ 1,800 Casualty loss from vandalism 200 2,000 1,600 Earnings before income taxes 31,600 Income tax expense 10,100 Net earnings $21,500 PW AUDIO SUPPLY, INC. Multiple-step Statement of Earnings For the Year Ended December 31, 2001

36. 35 Evaluating Profitability +Gross profit rate +Operating expenses to sales ratio

37. 36 Gross Profit Rate Gross profit rate = Gross profit Net sales Company’s gross profit expressed as a percentage

38. 37 Operating Expenses To Sales Ratio Operating expenses to sales ratio = Operating expenses Net sales Many companies have improved the efficiency of their operations, thus reducing the ratio of operating expenses to sales

39. 38 Decision Checkpoints +Is the price of goods keeping pace with changes in the cost of inventory? +Is management controlling operating costs? + Gross profit + Operating expenses to sales ratio

40. 39 COPYRIGHT Copyright © 2001 John Wiley & Sons Canada, Ltd. All rights reserved. Reproduction or translation of this work beyond that permitted by CANCOPY (Canadian Reprography Collective) is unlawful. Request for further information should be addressed to the Permissions Department, John Wiley & Sons Canada, Ltd. The purchaser may make back-up copies for his / her own use only and not for distribution or resale. The author and the publisher assume no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.