Download Chapter 5

Chapter
5-1
Chapter
5
Accounting for
Merchandising
Operations
Chapter
5-2
Accounting Principles, Ninth Edition
Study Objectives
1.
Identify the differences between service and
merchandising companies.
2.
Explain the recording of purchases under a perpetual
inventory system.
3.
Explain the recording of sales revenues under a
perpetual inventory system.
4.
Explain the steps in the accounting cycle for a
merchandising company.
5.
Distinguish between a multiple-step and a single-step
income statement.
6.
Explain the computation and importance of gross profit.
Chapter
5-3
Accounting for Merchandising Operations
Merchandising
Operations
Operating
cycles
Flow of
costs—
perpetual and
periodic
inventory
systems
Chapter
5-4
Completing
the
Accounting
Cycle
Recording
Purchases of
Merchandise
Recording
Sales of
Merchandise
Freight costs
Sales returns
and
allowances
Adjusting
entries
Closing entries
Multiple-step
income
statement
Sales
discounts
Summary of
merchandising
entries
Single-step
income
statement
Purchase
returns and
allowances
Purchase
discounts
Summary of
purchasing
transactions
Forms of
Financial
Statements
Classified
balance sheet
Merchandising Operations
Merchandising Companies
Buy and Sell Goods
Wholesaler
Retailer
Consumer
The primary source of revenues is referred to as
sales revenue or sales.
Chapter
5-5
SO 1 Identify the differences between service and merchandising companies.
Merchandising Operations
Income Measurement
Sales
Revenue
Less
Not used in a
Service business.
Illustration 5-1
Cost of
Goods Sold
Equals
Gross
Profit
Cost of goods sold is the total
cost of merchandise sold
during the period.
Chapter
5-6
Less
Operating
Expenses
Equals
Net
Income
(Loss)
SO 1 Identify the differences between service and merchandising companies.
Operating Cycles
The operating
cycle of a
merchandising
company
ordinarily is
longer than that
of a service
company.
Chapter
5-7
Illustration 5-2
SO 1 Identify the differences between service and merchandising companies.
Flow of Costs
Perpetual System
Features:
1.
Purchases increase Merchandise Inventory.
2. Freight costs, Purchase Returns and Allowances and
Purchase Discounts are included in Merchandise Inventory.
3. Cost of Goods Sold is increased and Merchandise Inventory
is decreased for each sale.
4. Physical count done to verify Merchandise Inventory
balance.
The perpetual inventory system provides a continuous record
of Merchandise Inventory and Cost of Goods Sold.
Chapter
5-8
SO 1 Identify the differences between service and merchandising companies.
Flow of Costs
Periodic System
Features:
1.
Purchases of merchandise increase Purchases.
2. Ending Inventory determined by physical count.
3. Calculation of Cost of Goods Sold:
Beginning inventory
Add: Purchases, net
Goods available for sale
Less: Ending inventory
Cost of goods sold
Chapter
5-9
$ 100,000
800,000
900,000
125,000
$ 775,000
SO 1 Identify the differences between service and merchandising companies.
Recording Purchases of Merchandise
Illustration 5-5
Made using cash or
credit (on account).
Normally recorded when
goods are received.
Purchase invoice should
support each credit
purchase.
Chapter
5-10
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Under the perpetual inventory system, companies record in the
Merchandise Inventory account the purchase of goods they
intend to sell.
Illustration: From INVOICE NO. 731 (Illustration 5-5) record
the journal entry Sauk Stereo would make to record its
purchase from PW Audio Supply.
May 4
Merchandise inventory
Accounts payable
Chapter
5-11
3,800
3,800
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Freight Costs – Terms of Sale
Illustration 5-6
Seller places goods Free
On Board the carrier, and
buyer pays freight costs.
Seller places goods Free
On Board to the buyer’s
place of business, and
seller pays freight costs.
Chapter
5-12
Freight costs incurred by the seller are an operating expense.
Recording Purchases of Merchandise
Illustration: Assume upon delivery of the goods on May 6,
Sauk Stereo pays Acme Freight Company $150 for freight
charges, the entry on Sauk Stereo’s books is:
May 6
Merchandise inventory
150
Cash
150
Assume the freight terms on the invoice in Illustration 5-5
had required PW Audio Supply to pay the freight charges, the
entry by PW Audio Supply would have been:
May 6
Freight-out (or Delivery Expense)
Cash
Chapter
5-13
150
150
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Returns and Allowances
Purchaser may be dissatisfied because goods are
damaged or defective, of inferior quality, or do not
meet specifications.
Chapter
5-14
Purchase Return
Purchase Allowance
Return 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.
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Question
In a perpetual inventory system, a return of
defective merchandise by a purchaser is
recorded by crediting:
a. Purchases
b. Purchase Returns
c. Purchase Allowance
d. Merchandise Inventory
Chapter
5-15
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Illustration: Assume that on May 8 Sauk Stereo returned to
PW Audio Supply goods costing $300.
May 8
Accounts payable
Merchandise inventory
Chapter
5-16
300
300
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Discounts
Credit terms may permit buyer to claim a cash
discount for prompt payment.
Advantages:
Purchaser saves money.
Seller shortens the operating cycle.
Example: Credit terms of 2/10, n/30, is read “two-ten, net
thirty.” 2% cash discount if payment is made within 10 days.
Chapter
5-17
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Discounts Terms
2/10, n/30
1/10 EOM
n/10 EOM
2% 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.
Chapter
5-18
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry Sauk makes to
record its May 14 payment.
May 14
Accounts payable
Merchandise Inventory
Cash
3,500
70
3,430
(Discount = $3,500 x 2% = $70)
Chapter
5-19
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Illustration: If Sauk Stereo failed to take the discount, and
instead made full payment of $3,500 on June 3, the journal
entry would be:
June 3
Accounts payable
Cash
Chapter
5-20
3,500
3,500
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Purchase Discounts
Should discounts be taken when offered?
Discount of 2% on $3,500
$3,500 invested at 10% for 20 days
$ 70.00
19.18
Savings by taking the discount
$ 50.82
Passing up the discount offered equates to paying an
interest rate of 2% on the use of $3,500 for 20 days.
Example: 2% for 20 days = Annual rate of 36.5%
(365/20 = 18.25 twenty-day periods x 2% = 36.5%)
Chapter
5-21
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Purchases of Merchandise
Summary of Purchasing Transactions
Illustration
Merchandise Inventory
Debit
4th - Purchase
6th – Freight-in
Balance
Chapter
5-22
$3,800
150
Credit
$300
70
8th - Return
14th - Discount
$3,580
SO 2 Explain the recording of purchases under a perpetual inventory system.
Recording Sales of Merchandise
Made for cash or credit (on account).
Normally recorded when
earned, usually when
goods transfer from
seller to buyer.
Illustration 5-5
Sales invoice should
support each credit
sale.
Chapter
5-23
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Two Journal Entries to Record a Sale
#1
#2
Chapter
5-24
Cash or Accounts receivable
Sales
XXX
Cost of goods sold
Merchandise inventory
XXX
XXX
XXX
Selling
Price
Cost
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Illustration: Assume PW Audio Supply records its May 4
sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows.
Assume the merchandise cost PW Audio Supply $2,400.
May 4
Accounts receivable
3,800
Sales
4
3,800
Cost of goods sold
Merchandise inventory
Chapter
5-25
2,400
2,400
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Sales Returns and Allowances
“Flipside” of purchase returns and allowances.
Contra-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.
Chapter
5-26
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Illustration: Prepare the entry PW Audio Supply would make
to record the credit for returned goods that had a $300
selling price (assume a $140 cost). Assume the goods were
not defective.
May 8
Sales returns and allowances
300
Accounts receivable
8
Merchandise inventory
Cost of goods sold
Chapter
5-27
300
140
140
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Illustration: Assume the returned goods were defective and
had a scrap value of $50, PW Audio would make the following
entries:
May 8
Sales returns and allowances
300
Accounts receivable
8
Merchandise inventory
Cost of goods sold
Chapter
5-28
300
50
50
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Review Question
The cost of goods sold is determined and
recorded each time a sale occurs in:
a. periodic inventory system only.
b. a perpetual inventory system only.
c. both a periodic and perpetual inventory
system.
d. neither a periodic nor perpetual inventory
system.
Chapter
5-29
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Chapter
5-30
Recording Sales of Merchandise
Sales Discount
Offered to customers to promote prompt payment.
“Flipside” of purchase discount.
Contra-revenue account (debit).
Chapter
5-31
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Illustration: Assume Sauk Stereo pays the balance due of
$3,500 (gross invoice price of $3,800 less purchase returns
and allowances of $300) on May 14, the last day of the
discount period. Prepare the journal entry PW Audio Supply
makes to record the receipt on May 14.
May 14
Cash
3,430
Sales discounts
Accounts receivable
70
*
3,500
* [($3,800 – $300) X 2%]
Chapter
5-32
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Recording Sales of Merchandise
Discussion Question
Q5-9 Joan Roland believes revenues from credit
sales may be earned before they are
collected in cash. Do you agree? Explain.
See notes page for discussion
Chapter
5-33
SO 3 Explain the recording of sales revenues
under a perpetual inventory system.
Completing the Accounting Cycle
Adjusting Entries
Generally 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.
Chapter
5-34
SO 4 Explain the steps in the accounting cycle for a merchandising company.
Completing the Accounting Cycle
Illustration: Suppose that PW Audio Supply has an
unadjusted balance of $40,500 in Merchandise Inventory.
Through a physical count, PW Audio determines that its actual
merchandise inventory at year-end is $40,000. The company
would make an adjusting entry as follows.
Cost of goods sold
Merchandise inventory
Chapter
5-35
500
500
SO 4 Explain the steps in the accounting cycle for a merchandising company.
Completing the Accounting Cycle
Closing
Entries
Chapter
5-36
Forms of Financial Statements
Multiple-Step Income Statement
Shows several steps in determining net income.
Two steps relate to principal operating
activities.
Distinguishes between operating and nonoperating activities.
Chapter
5-37
SO 5 Distinguish between a multiple-step and a single-step income statement.
Calculation of Gross Profit
Illustration 5-13
Key Items:
Net sales
Gross profit
Gross profit
rate
Illustration 5-10
Chapter
5-38
SO 6 Explain the computation and importance of gross profit.
Forms of
Financial
Statements
Illustration 5-13
MultipleStep
Key Items:
Net sales
Gross profit
Operating
expenses
Chapter
5-39
SO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of
Financial
Statements
Illustration 5-13
Key Items:
Net sales
Gross profit
Operating
expenses
Nonoperating
activities
Net income
Chapter
5-40
SO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of Financial Statements
Review Question
The multiple-step income statement for a
merchandiser shows each of the following
features except:
a. gross profit.
b. cost of goods sold.
c. a sales revenue section.
d. investing activities section.
Chapter
5-41
SO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of Financial Statements
Single-Step Income Statement
Subtract total expenses from total revenues
Two reasons for using the single-step format:
1) Company does not realize any type of profit
until total revenues exceed total expenses.
2) Format is simpler and easier to read.
Chapter
5-42
SO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of Financial Statements
SingleStep
Chapter
5-43
Illustration 5-14
SO 5 Distinguish between a multiple-step and a single-step income statement.
Forms of Financial Statements
Classified Balance Sheet
Chapter
5-44
Illustration 5-15
SO 5 Distinguish between a multiple-step and a single-step income statement.
Periodic Inventory System
Periodic System
Separate accounts used to record purchases,
freight costs, returns, and discounts.
Company does not maintain a running account
of changes in inventory.
Ending inventory determined by physical count.
Chapter
5-45
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Periodic Inventory System
Calculation of Cost of Goods Sold
Illustration 5A-1
$316,000
Chapter
5-46
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Purchases under Periodic System
Illustration: On the basis of the sales invoice (Illustration 5-5)
and receipt of the merchandise ordered from PW Audio
Supply, Sauk Stereo records the $3,800 purchase as follows.
May 4
Purchases
Accounts payable
Chapter
5-47
3,800
3,800
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Purchases under Periodic System
Freight Costs
Illustration: If Sauk pays Haul-It Freight Company $150
for freight charges on its purchase from PW Audio Supply on
May 6, the entry on Sauk’s books is:
May 6
Freight-in (Transportation-in)
Cash
Chapter
5-48
150
150
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Purchases under Periodic System
Purchase Returns and Allowances
Illustration: Sauk Stereo returns $300 of goods to PW Audio
Supply and prepares the following entry to recognize the
return.
May 8
Accounts payable
300
Purchase returns and allowances
Chapter
5-49
300
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Purchases under Periodic System
Purchase Discounts
Illustration: On May 14 Sauk Stereo pays the balance due on
account to PW Audio Supply, taking the 2% cash discount
allowed by PW Audio for payment within 10 days. Sauk
Stereo records the payment and discount as follows.
May 14
Accounts payable
Purchase discounts
Cash
Chapter
5-50
3,500
70
3,430
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Sales under Periodic System
Illustration: PW Audio Supply, records the sale of $3,800 of
merchandise to Sauk Stereo on May 4 (sales invoice No. 731,
Illustration 5-5) as follows.
May 4
Accounts receivable
Sales
3,800
3,800
No entry is recorded for cost of goods sold at the time of
the sale under a periodic system.
Chapter
5-51
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Sales under Periodic System
Sales Returns and Allowances
Illustration: To record the returned goods received from
Sauk Stereo on May 8, PW Audio Supply records the $300
sales return as follows.
May 4
Sales returns and allowances
Accounts receivable
Chapter
5-52
300
300
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Recording Sales under Periodic System
Sales Discounts
Illustration: On May 14, PW Audio Supply receives payment of
$3,430 on account from Sauk Stereo. PW Audio honors the 2%
cash discount and records the payment of Sauk’s account
receivable in full as follows.
May 14
Cash
3,430
Sales discounts
Accounts receivable
Chapter
5-53
70
3,500
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Comparison of Entries—Perpetual Vs. Periodic
Illustration 5A-2
Chapter
5-54
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Comparison of Entries—Perpetual Vs. Periodic
Illustration 5A-2
Chapter
5-55
SO 7 Explain the recording of purchases and sales of
inventory under a periodic inventory system.
Worksheet for a Merchandising Company
Illustration 5B-1
Chapter
5-56
Copyright
“Copyright © 2009 John Wiley & Sons, Inc. All rights reserved.
Reproduction or translation of this work beyond that permitted
in Section 117 of the 1976 United States Copyright Act without
the express written permission of the copyright owner is
unlawful. Request for further information should be addressed
to the Permissions Department, John Wiley & Sons, Inc. The
purchaser may make back-up copies for his/her own use only
and not for distribution or resale. The Publisher assumes no
responsibility for errors, omissions, or damages, caused by the
use of these programs or from the use of the information
contained herein.”
Chapter
5-57