5- 1

Adjusting Entries for Merchandisers

Z-Mart’s Merchandise Inventory account at the end of year 2013 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists.

P3

A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of

merchandise, including theft and deterioration.

5- 2

Inventory ControlThe continuous tracking of transactions in a perpetual inventory

system allows companies to keep just the right quantity of products on the shelves for just the right amount of time. New microchip

technology allows the transmitting of data automatically from every inventory item that enters, moves within, and exits a store.

Managers can estimate inventory theft, fraud, and error like this: Determine inventory on hand at the beginning of the period. Monitor every piece of inventory that enters and exits inventory.

Add any purchases:

Subtract any goods that are sold:

Count inventory to determine what is actually there (on hand).

Oct. 1

+

-

ForOctober

Quantity per accounting records

Shrinkage (theft, fraud, error)

5- 3

Closing Entries for MerchandisersP3

5- 4

P4

A multiple-step income

statement format shows

detailed computations of net sales and othercosts and

expenses, and reports

subtotals for various

classes of items.

5- 6

Classified Balance Sheet

HighlyLiquid

LessLiquid

5- 8

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

= Quick Assets

Current LiabilitiesAcid-Test

Ratio

Acid-TestRatio

= Cash + S-T Investments + Receivables

Current Liabilities

Acid-Test RatioA1

5- 9

Percentage of dollar sales available to

cover expenses and provide a profit.

GrossMarginRatio

Net Sales - Cost of Goods Sold Net Sales

=

Gross Margin RatioA2

5- 13

Appendix 5B: Worksheet—Perpetual System

P5