Download Chapter 4 - Fisher College of Business

Accounting for
Merchandising Businesses
Chapter 4
Service Businesses vs. Merchandise
Operations
• Service Businesses
• Revenue activities involve providing
services to customers.
• Example: Family Health Care, P.C.
• Merchandise Operations
– Revenue activities involve the buying
and selling of merchandise.
– Example: Home Depot Inc.
H&R BLOCK
Condensed Income Statement
For the Year Ending April 30, 2007
(in millions)
Revenue
Operating expenses
Operating income
Other income
Income before taxes
Income taxes
Net income
$3,002
2,537
$ 465
8
$ 473
196
$ 277
Best Buy
Condensed Income Statement
For the Year Ending December 28, 2007
(in millions)
Net sales
Cost of merchandise sold
Gross profit
Operating expenses
Operating income
Other income
Income before taxes
Income taxes
Net income
$45,738
32,057
$13,681
9,490
$ 4,191
26
$ 4,217
1,636
$ 2,581
What’s different on a
merchandising income statement?
Purchases
Purchases
$521,980
Less: Purchases returns and allowances $9,100
Purchases discounts
2,525 11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
$527,755
Detailed Cost of Merchandise Sold Section
Merchandise inventory, Jan. 1, 2010
Purchases
$521,980
Less: Pur. returns and allow.
$9,100
Purchases discounts
2,525
11,625
Net purchases
$510,355
Add transportation-in
17,400
Cost of merchandise purchased
Merchandise available for sale
Less merchandise inventory, Dec. 31, 2010
Cost of merchandise sold
$ 59,700
527,755
$587,455
62,150
$525,305
Sales Transactions
On January 3 Fisher Company sells merchandise
costing $3,000 for $5,000. The sale is made
a. For cash
b. On account
Sales Discounts
Credit Terms
3/10, n/30
The buyer is
allowed a 3%
discount if…
The net (full)
…the account is
paid within 10 amount is due by
th day.
the
30
days.
Sales Discounts
On January 12 Fisher Company sells merchandise
on account to Omega Tech for $4,000. Credit
terms are 3/10, n/30. Omega Tech pays within the
discount period.
4-14
Sales Returns and Allowances
On January 13 Fisher Company issues a $1,000
credit memorandum to Krier Company for
merchandise that was returned. The merchandise
(cost $600) was sold on account.
Purchase Transactions
On January 6 Fisher Company purchased
$6,000 of merchandise on account (terms:
2/10, n/30) from Quantum Company. Recall
that Fisher Company uses the perpetual
system.
4-16
Purchase Returns and Allowances
On January 9 Fisher Company returns
$2,000 of merchandise purchased from
Quantum Inc.
Purchase Discounts
On January 15, Fisher Company pays the
amount due to Quantum
Sales and Purchase Transactions
Based on the information below, illustrate the
effects on the accounts and financial statements
(Balance Sheet and Income Statement) of the
seller and buyer:
(a) Seller sells Buyer on account merchandise
costing $300 for $500, terms 2/10, net 30.
(b) Buyer returns as defective $100 worth of the
$500 merchandise received. The seller’s cost
of this merchandise is $60.
(c) Buyer pays within the discount period.
Freight
Transportation Costs
On January 19 Fisher Company buys
merchandise from Data Max on account,
$2,900, terms FOB shipping point, and
prepays the transportation cost of $150.
Illustrate the effect on the accounts and
financial statements related to these
transactions.
Sales Taxes
When sale is made,
liability for sales tax
is recorded as an
obligation by the
seller
Payment is made to
state taxing
authority to satisfy
obligation
Inventory Shrinkage
Fisher Company’s records on December 31, 2007
show that the book inventory of merchandise is
$70,100. The physical inventory taken on that date
indicates that the value of the inventory is $69,800.
What is the effect of this shrinkage on the accounts
and financial statements?
Inventory Shrinkage
Nocturnal Company’s perpetual inventory
records indicate that $417,200 of merchandise
should be on hand on October 31, 2011. The
physical inventory indicates that $400,680 of
merchandise is actually on hand. Illustrate the
effects on the accounts and financial
statements of the inventory shrinkage for
Nocturnal Company for the year ended
October 31, 2011.