1. STUDY OBJECTIVES After studying this chapter, you should understand: CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS CHAPTER 6 ACCOUNTING FOR MERCHANDISING OPERATIONS The differences between a service company and a merchandiser Single & multiple step income statements Purchase entries—perpetual inventoryHow to compute gross profit Revenue entries--perpetual inventory COGS -- periodic inventory Completing the accounting cycle

2. STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY STUDY OBJECTIVE 1 MERCHANDISER VS. SERVICE COMPANY - A service company provides a service to earn a profit. No COGS A merchandiser buys and sells goods to earn a profit. Wholesalers/Retailers COGS

3. Sales Revenue Cost of Goods Sold Gross Profit Operating Expenses Net Income (Loss) Less Equals Less Equals INCOME MEASUREMENT MERCHANDISER INCOME MEASUREMENT MERCHANDISER

4. Accounts Receivable Cash Service Company Merchandising Company Accounts Receivable Merchandise Inventory Receive Cash Perform Services Receive Cash Buy Inventory Sell Inventory OPERATING CYCLE COMPARISON

5. INVENTORY SYSTEMS PERPETUAL INVENTORY Inventory purchased Record purchase Item sold Record revenue & COGS End of period No entry Inventory purchased Record purchase Item sold Record revenue only End of period Compute and record COGS PERIODIC INVENTORY SOLD

6. STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY MERCHANDISE INVENTORYCASH COST MERCHANDISE INVENTORY A/P COST Cash purchase Credit purchase The purchase is normally recorded when the goods are received Credit purchases are normally supported by a purchase invoice

7. 3800 STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 2 PURCHASE ENTRIES – PERPETUAL INVENTORY 3800 Cash purchase Credit purchase

8. FOB SHIPPING POINTFOB DESTINATION Title transfers to buyer at sellers shipping dock Buyer pays freight costs Title transfers to buyer at buyers receiving dock Seller pays freight costs SHIPPING TERMS – FREE ON BOARD

9. Freight costs are part of the cost of inventory purchased. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 6Merchandise Inventory Cash (To record payment of freight, terms FOB shipping point) 150 ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER ACCOUNTING FOR FREIGHT COSTS PAID BY BUYER

10. Freight costs incurred by the seller are selling expenses called Freight-out. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 4Freight-out (Delivery Expense) Cash (To record payment of freight on goods sold FOB destination) 150 ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER ACCOUNTING FOR FREIGHT COSTS PAID BY SELLER

11. For purchases returns and allowances, Accounts Payable is debited and Merchandise Inventory is credited. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 8Accounts Payable Merchandise Inventory (To record return of inoperable goods received from Highpoint Electronic, DM No. 126) 300 PURCHASE RETURNS AND ALLOWANCES Seller Buyer

12. If payment is made within the discount period, Merchandise inventory is credited for the discount taken. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 14Accounts Payable Cash Merchandise Inventory (To record payment within discount period) 3,500 3,430 70 Credit terms may permit the buyer to claim a cash discount for the prompt payment of a balance due. PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD PURCHASE DISCOUNTS PAYMENT WITHIN DISCOUNT PERIOD

13. If payment is made after the discount period, Accounts Payable is debited and Cash is credited for the full amount. GENERAL JOURNAL DateAccount Titles and ExplanationDebitCredit June 3Accounts Payable Cash (To record payment with no discount taken) 3,500 PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD PURCHASE DISCOUNTS PAYMENT AFTER DISCOUNT PERIOD

14. STUDY OBJECTIVE 3 REVENUE ENTRIES – PERPETUAL INVENTORY STUDY OBJECTIVE 3 REVENUE ENTRIES – PERPETUAL INVENTORY Revenues are reported when earned in accordance with the revenue recognition principle. All sales should be supported by a cash register tape (cash sales) or sales invoice (credit sales). In a merchandising company, revenues are earned when the goods are transferred from seller to buyer.

15. For cash sales, simply replace the debit to accounts receivable with a debit to cash. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 4Accounts Receivable Sales (To record credit sales to Chelsea Video per invoice #731) 4Cost of Goods Sold Merchandise Inventory (To record cost of merchandise sold on invoice #731 to Chelsea Video) 3,800 2,400 REVENUE ENTRIES – PERPETUAL INVENTORY

16. SALES RETURNS & ALLOWANCES SALES RETURN Customer returns goods to the seller for credit or a refund. SALES ALLOWANCE Seller allows a reduction in selling price. Goods are not returned. Seller prepares a CREDIT MEMORANDUM.

17. Sales Returns and Allowances is a CONTRA-REVENUE account. It’s normal balance is a DEBIT. (To record cost of goods returned) 300 140 RECORDING SALES RETURNS & ALLOWANCES RECORDING SALES RETURNS & ALLOWANCES

18. 2/10, n/30 A 2% discount may be taken if payment is made within 10 days of the invoice date. 1/10 EOM A 1% discount is available if payment is made by the 10 th of the next month. SALES DISCOUNTS Seller offers customer a cash discount for prompt payment of balance due. Credit terms indicate the discount percent, Discount period, and final due date.

19. Sales discounts is a CONTRA-REVENUE ACCOUNT. It’s normal balance is a DEBIT. GENERAL JOURNAL DateAccount Titles and ExplanationDr.Cr. May 14Cash Sales Discounts Accounts Receivable (To record collection within 2/10, n/30 discount period from Beyer Video) 3,430 70 3,500 RECORDING SALES DISCOUNTS RECORDING SALES DISCOUNTS

20. After all adjustments have been posted, closing entries are prepared from the Income Statement section of the worksheet. 480,000 COMPLETING THE ACCOUNTING CYCLE Study Objective 4 COMPLETING THE ACCOUNTING CYCLE Study Objective 4 All accounts that affect the determination of net income are closed to Income Summary.

21. Cost of Goods Sold is closed to Income Summary. Freight-out Advertising Expense Utilities Expense Depreciation Expense Insurance Expense (To close income statement accounts with debit balances) 450,000 12,000 8,000 316,000 45,000 19,000 7,000 16,000 17,000 8,000 2,000 CLOSING ENTRIES

22. After the closing entries are posted, all temporary accounts have zero balances. Dividends (To close dividends to retained earnings) 30,000 15,000 CLOSING ENTRIES

23. STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT STUDY OBJECTIVE 5 MULTIPLE - STEP INCOME STATEMENT Sales revenues Sales$480,000 Less: Sales returns & allowances$12,000 Sales Discounts 8,00020,000 Net Sales$460,000 Illustration 5-6 Computation of Net Sales

24. STUDY OBJECTIVES 5 & 6 MULTIPLE - STEP INCOME STATEMENT STUDY OBJECTIVES 5 & 6 MULTIPLE - STEP INCOME STATEMENT Net Sales$460,000 Less: Cost of Goods Sold316,000 Gross Profit$144,000 Operating Expenses114,000 Net Income$30,000 The multiple step income statement arrives at net income in stages. Sellers Electronix Income Statement The multiple step income statement also distinguished between operating and non-operating activities.

25. MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES MULTIPLE - STEP INCOME STATEMENT NON-OPERATING ACTIVITIES OTHER REVENUES & GAINS OTHER LOSSES & EXPENSES Interest revenueInterest expense Dividend revenueCasualty losses Rent revenueLoss from employee strikes Gains on sale of assetsLoss on sale of assets NON-OPERATING ACTIVITIES

26. 200 Total expenses 432,000 Net income $ 31,600 All data are classified under two categories: 1 Revenues 2 Expenses Only one step is required in determining net income or net loss. All data are classified under two categories: 1 Revenues 2 Expenses Only one step is required in determining net income or net loss. SINGLE-STEP INCOME STATEMENT SINGLE-STEP INCOME STATEMENT

27. STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY STUDY OBJECTIVES 7 COST OF GOODS SOLD—PERIODIC INVENTORY Cost of Goods Sold: Inventory, January 1$36,000 Purchases$325,000 Less: Purchase returns & allowances$10,400 Purchase discounts6,80017,200 Net purchases307,800 Add: Freight-in12,200 Cost of Goods Purchased320,000 Cost of Goods Available for Sale356,000 Inventory, December 31 (physical count required) 40,000 Cost of Goods Sold316,000 Sellers Electronix Cost of Goods Sold For the year ended December 31, 2006