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PowerPoint to accompany Chapter 5 Retailing Operations Learning Objectives 1. 2. 3. 4. 5. 6. Account for the purchase of inventory and GST Account for the sale of inventory and GST Adjust and close the accounts of a retailing business Prepare a retailer’s financial statements Use gross profit percentage and the inventory turnover to evaluate a business Calculate cost of sales in a periodic inventory system Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Income Statements Service Firm Income Statement Year ended June 30, 20XX Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net profit $ xx Retailing Firm Income Statement Year ended June 30, 20XX Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net profit $ xx Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Operating Cycle of a Retailing Business Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia GST (Goods and Services Tax) Most retailers are registered for GST: The GST paid is claimed back from the ATO. The GST collected is paid to the ATO. (Reality – net difference is paid or claimed.) So sales and purchases are shown net of GST. Retailers who are not registered: They do not charge GST on sales. GST paid on purchases is added to the cost. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Inventory Systems Periodic Perpetual Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 1 Account for the purchase of inventory and GST GST. (The Perpetual Inventory System) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Purchase of Inventory Retailer prepares purchase order d Suppliers send inventory and d a bill Compares Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Purchase of Inventory Example On May 1, the Sporting Store acquired on account $2,000 (plus 10% GST) of various items for resale. The supplier sent the inventory along with a bill (invoice) stating the quantity, price, and terms of sale. What is the journal entry with GST? Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Purchase of Inventory Example May 1 Inventory 2,000 GST Clearing 200 Accounts Payable 2,200 Purchased inventory on account (on credit) Inventory 2,000 Accounts Payable 2,200 GST 200 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Recording Purchase Returns and Allowances Example Assume that on May 4 a $100 item was returned prior to payment of the invoice. What is the journal entry? May 4 Accounts Payable Inventory GST Clearing 110 100 10 Inventory returned Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Recording Purchase Returns and Allowances Example Assume that one of the items of inventory is slightly damaged, and the store was given a $10 allowance. What is the journal entry? May 4 Accounts Payable Inventory GST Clearing 11 10 1 Received a purchase allowance Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Recording Purchase Returns and Allowances Example Inventory 2,000 100 10 Bal. 1,890 GST Clearing 200 10 1 Bal 189 Accounts Payable 110 2,200 11 B l 22,079 Bal. 079 A ‘Purchase Returns and Allowances’ account could be used Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Settlement Discounts Quantity or trade discounts simply reduce the cost of purchases. Settlement discounts have credit terms stated in expressions such as: 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days. Settlement discounts reduce the cost of inventory. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Settlement Discount Example Assume the Sporting Store purchased inventory for $1,000 (plus GST) with terms of 2/10, N/30. The store paid within the discount period. The 2% discount ($22) is deducted from the amount due ($1,100) and $1,078 is remitted (paid). Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Settlement Discounts Example What is the journal entry? Accounts Payable 1,100 Cash ($1,100 x .98 ) 1,078 Inventory ($1,100 ($1 100 x .02 02 x 10/11) 20 GST Clearing ($1,100 x .02 x 1/11) 2 Payment of invoice within the discount period Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Transportation Costs Transportation costs are the cost of moving inventory from seller to buyer. FOB stands for Free on Board and governs the passing of title of the goods. Selling/buying agreements usually specify FOB terms. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Transportation Costs FOB Shipping Point FOB Destination Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Freight Charges Freight in charges increase the cost of inventory (if the supplier had to deliver the goods they would have charged us g p price). ) a higher Freight out is an operating expense and is debited to the Delivery Expenses account. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 2 Account for sale of inventory and GST GST. (The Perpetual Inventory System) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sporting Store Example Assume that on May 11 the store sold inventory (merchandise, goods, stock) costing $1,000 for $3,300 cash (GST ) inclusive). What are the journal entries? Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sporting Store Example Cash Sales Revenue GST Clearing 3,300 3,000 300 To record the cash sale Cost of Sales Inventory 1,000 1,000 To record the cost of inventory sold Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sporting Store Example On May 15, the store sold on credit to Maria Gym sporting goods for $5,000 (plus GST), goods with a cost of $3,000. 500 (not cash) Dr Accounts Receivable $5 $5,500 cash). Terms are 5/10, N/60. Maria Gym Total Invoice Terms 5/10, N/60 $5,000 plus GST Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Returns, Allowances and Settlement Discounts Example On May 17, Maria Gym returned $1,100 (includes GST) of goods that cost $600. addition, a credit of $220 was In addition allowed for inventory that was damaged. What are the journal entries? Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Returns, Allowances and Settlement Discounts Example Sales Returns and Allowance 1,000 GST Clearing 100 Accounts Receivable 1,100 Received returned inventory (no GST in Sales Ret. Ret and Allow. because Sales are recorded net of GST) Inventory Cost of Sales 600 600 Returned goods to inventory (no GST because Inventory is recorded net of GST) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Returns, Allowances and Settlement Discounts Example Sales Returns and Allowance GST Clearing Accounts Receivable 200 20 220 Credit granted for damaged goods There is no entry required for inventory since the goods were not returned. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Returns, Allowances and Settlement Discounts Example On May 20, the store received a cheque from Maria Gym for the balance due. What is the balance due? Accounts Receivable May 15 = $5,500 Less May 17 returns and allowances $1,320 Equals May 20 balance due of $4,180 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Returns, Allowances and Settlement Discounts Example Maria took advantage of the sales terms – 5/10, N/60. Cash ($4,180 ($4 180 x .95) 3 971 3,971 Sales Discounts ($209 x 10/11) 190 GST Clearing ($209 x 1/11) 19 Accounts Receivable 4,180 Cash collected within the discount period ‘Sales Discount’ is a contra ‘Sales’ account Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Using sales, cost of sales and gross profit to evaluate a business. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales Revenue Net sales = Sales Revenue less Sales Discounts less Sales Returns Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Gross Profit Gross Profit (Gross Margin) = Net Sales less Cost of Sales (cost to the retailer of the goods they are selling) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 3 Adjust and close the accounts of a retailing business. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Adjustments to Inventory Example Book Inventory Balance $255,000 Physical Count $252,500 $2,500 difference Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Adjustments to Inventory Example What is the journal entry? June 30 Cost of Sales (or Inventory Loss) Inventory 2,500 2,500 To adjust inventory to physical count Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Closing Entries for a Retailing Business Sales Sales Disc. 2,760,000 7,348 C.O.S. 1,490,400 Supplies Exp. Income Summary 1,891,696 2,760,000 868 304 868,304 22,824 Rent Exp. 32,605 Other Exp. 338,519 Capital 868,304 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Closing Entries Before the closing entry Rent Expense had a debit balance of $32,605. June 30 Closing entry Income Summary 32,605 Rent Exp. 32,605 To close the rent expense account After the closing entry Rent Expense has a zero balance. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 4 Prepare a retailer’s financial statements. statements Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Income Statement Formats There are two basic formats for the income statement: 1. Descriptive format (only used for service businesses) 2. Functional format (provides more detail of a retailer’s operations) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Functional Format Sporting Store Income Statement Year Ended June 30, 20X0 Sales revenue Less Returns and allowances Less Sales discount Net sales revenue Less Cost of goods sold $2,760,000 0 7,348 2,752,652 1,490,400 Gross profit 1,262,252 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Functional Format Gross profit Less Operating expenses: Rent expense p Other expenses Supplies expense $1,262,252 32,605 , 338,519 22,824 Total Expenses 393,948 Net profit $ 868,304 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 5 Use gross profit percentage and inventory y turnover to evaluate a business. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Using the Financial Statements for Decision Making Gross profit percentage = Gross profit ÷ Net sales revenue Inventory turnover = Cost of Sales ÷ Average inventory Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Gross Profit on $1 of Sales (example only – not real numbers) Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Exhibit 5-9 Rate of Inventory Turnover for Two Retailers (example only) Exhibit 5-10 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Objective 5 Calculate cost of sales in a periodic inventory system Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Cost of Sales In the periodic inventory system COGS must be calculated at the end of the accounting period after a stock-take is conducted. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Calculating the Cost of Sales in a Periodic System Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia COS Beginning Inventory Plus Purchases Plus Freight In L Less P Purchase h R Returns t and d All Allowances Equals Cost of Goods Available for Sale Less Ending Inventory Equals COS Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Appendix Accounting for inventory in a periodic inventory system Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Purchases With the perpetual inventory system when a purchase is made ‘Inventory’ is debited. With the periodic inventory system when inventory is purchased we debit ‘Purchases’ account. Purchase returns are treated the same – credit ‘Purchase Returns and Allowances’. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Sales With the perpetual inventory system when a sale is made we record both the money flow (‘Accounts Receivable’ and ‘Sales’) and the goods flow (‘Inventory’ and ‘Costs of Sales’). With the periodic inventory system when inventory is sold we only record the money flow. Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia PowerPoint to accompany End of Chapter 5 Horngren, Best, Fraser, Willett: Accounting 6e © 2010 Pearson Australia