PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W. Caldwell, D.B.A., CMA Jon A. Booker, Ph.D., CPA, CIA Cynthia J. Rooney, Ph.D., CPA

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 05

ACCOUNTING FOR MERCHANDISING OPERATIONS

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Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms and

plumbing services

SERVICE COMPANIES C 1

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Manufacturer Wholesaler Retailer Consumers

Merchandising Companies

MERCHANDISER C 1

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REPORTING INCOME FOR A MERCHANDISER

Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

C 1

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OPERATING CYCLE FOR A MERCHANDISER

Begins with the purchase of merchandise and ends with the collection of cash from the

sale of merchandise.

C 2

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INVENTORY SYSTEMS C 2

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Perpetual systems continually update

accounting records for merchandising transactions

Periodic systems accounting records

relating to merchandise transactions are updated only at the end of the accounting period

C 2

INVENTORY SYSTEMS

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MERCHANDISE PURCHASES

On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.

P1

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TRADE DISCOUNTS Used by manufacturers and wholesalers

to offer better prices for greater quantities purchased.

Example Z-Mart offers a 30% trade

discount for orders of 1,000 units or more on its popular

product Racer. Each Racer has a list price of $5.25.

Quantity sold 1,000 Price per unit 5.25$ Total 5,250 Less 30% discount (1,575) Invoice price 3,675$

P1

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P1 ACCOUNTING FOR MERCHANDISE PURCHASES

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PURCHASE DISCOUNTS

A deduction from the invoice price granted to induce early payment of the amount due.

P1

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2/10,n/30 Discount Percent

Number of Days

Discount Is Available

Otherwise, Net (or All) Is Due in 30

Days

Credit Period

PURCHASE DISCOUNTS P1

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On November 2, Z-Mart purchased $1,200 of merchandise inventory on account, credit

terms are 2/10, n/30.

PURCHASE DISCOUNTS P1

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On November 12, Z-Mart paid the amount due on the purchase of November 2.

PURCHASE DISCOUNTS P1

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PURCHASE DISCOUNTS

After we post these entries, the accounts involved look like these:

P1

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PURCHASE RETURNS AND ALLOWANCES

Purchase Return . . . Merchandise returned by the purchaser to

the supplier. Purchase Allowance . . .

A reduction in the cost of defective or unacceptable merchandise received by a purchaser from a supplier.

P1

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On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance

from Trex for defective merchandise.

PURCHASE RETURNS AND ALLOWANCES

P1

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Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays

on June 11, it takes the 2% discount only on the $900 remaining balance.

PURCHASE RETURNS AND ALLOWANCES

P1

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TRANSPORTATION COSTS AND OWNERSHIP TRANSFER

P1

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TRANSPORTATION COSTS

Z-Mart purchased merchandise on terms of FOB shipping point. The transportation charge is

$75.

P1

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ACCOUNTING FOR MERCHANDISE P1

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ACCOUNTING FOR MERCHANDISE SALES

P2

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SALES OF MERCHANDISE P2

Each sales transaction for a seller of merchandise involves two parts:

Revenue received in the form of an asset

from a customer.

Recognition of the cost of merchandise sold to a customer.

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On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a

cost basis to Z-Mart of $1,600.

SALES OF MERCHANDISE P2

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SALES DISCOUNTS P2

Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future

collection efforts.

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Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

SALES DISCOUNTS P2

The account was paid in full within the 60-day period.

The account was paid in full within the 10-day discount period.

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SALES RETURNS AND ALLOWANCES P2

Sales returns and allowances usually involve dissatisfied customers and the possibility of

lost future sales.

Sales returns refer to merchandise that customers return to

the seller after a sale.

Sales allowances refer to reductions in the selling price of

merchandise sold to customers.

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Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of

the merchandise. The returned items sell for $800 and cost $600.

SALES RETURNS AND ALLOWANCES P2

Sales Returns and Allowances is a Contra Account subtracted from sales Defective inventory valued at estimated value not its cost

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Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but the buyer

decides to keep it because Z-Mart offers a $100 price reduction. Sales Allowance

SALES ALLOWANCES P2

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MERCHANDISING COST FLOW IN THE ACCOUNTING CYCLE

Beginning inventory

Net purchases

Merchandise available for sale

Ending inventory

Cost of goods sold To Income Statement

To Balance Sheet

To Income Statement To Balance Sheet

Perio

d 1

Beginning inventory

Net purchases

Merchandise available for sale

Ending inventory

Cost of goods sold

Perio

d 2

P2

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ADJUSTING ENTRIES FOR MERCHANDISERS

Z-Mart’s Merchandise Inventory account at the end of year 2011 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.

Inventory Shrinkage difference of physical count and recorded inventory

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CLOSING ENTRIES FOR MERCHANDISERS

P3

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P4

A multiple-step income

statement format shows

detailed computations of net sales and other costs and

expenses, and reports

subtotals for various

classes of items.

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SINGLE-STEP INCOME STATEMENT P4

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CLASSIFIED BALANCE SHEET

Highly Liquid

Less Liquid

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GLOBAL VIEW

Accounting for Merchandise Purchases and Sales Both U.S. GAAP and IFRS include broad and similar guidance

for the accounting of merchandise purchases and sales.

Financial Statement Differences 1. Order of expenses 2. Separate disclosures 3. Presentation of expenses 4. Classification of operating and

nonoperating expenses 5. Alternative measures of income 6. Order of current and noncurrent

items on the balance sheet

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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 Liabilities

Acid-Test Ratio

Acid-Test Ratio = Cash + S-T Investments + Receivables

Current Liabilities

ACID-TEST RATIO A1

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Percentage of dollar sales available to

cover expenses and provide a profit.

Gross Margin Ratio

Net Sales - Cost of Goods Sold Net Sales =

GROSS MARGIN RATIO A2

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JCPENNEY A1/A2

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APPENDIX 5A: PERIODIC INVENTORY SYSTEM

P5

A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

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APPENDIX 5A: PERIODIC INVENTORY SYSTEM

P5

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APPENDIX 5B: WORKSHEET—PERPETUAL SYSTEM

P5

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END OF CHAPTER 05