accounting for merchandising activities powerpoint slides to accompany fundamental accounting...

Accounting Accounting for for

MerchandisinMerchandising Activitiesg Activities

PowerPoint Slides to accompanyFundamental Accounting Principles, 14ce

Prepared byJoe Pidutti, Durham College

CHAPTER

5

© 2013 McGraw-Hill Ryerson Limited.

1. Describe merchandising and identify and explain the important income statement and balance sheet components for a merchandising company. (LO1)

2. Describe both periodic and perpetual merchandise inventory systems. (LO2)

3. Analyze and record transactions for merchandise purchases and sales using a perpetual system. (LO3)

2 © 2013 McGraw-Hill Ryerson Limited.

Learning ObjectivesLearning Objectives

4. Prepare adjustments for a merchandising company. (LO4)

5. Define, prepare, and use merchandising

income statements. (LO5)6. Prepare closing entries for a merchandising

company. (LO6)



3

7. Record and compare merchandising transactions using both periodic and perpetual inventory systems.

(Appendix 5A) (LO7)8. Explain and record Provincial Sales Tax

(PST) and Goods and Services Tax

(GST). (Appendix 5B) (LO8)



4

Merchandiser: A company that earns net income by buying and selling merchandise.

Wholesaler: A company that buys products

from manufacturers or other wholesalers and sells them to retailers or other wholesalers.


Merchandising ActivitiesMerchandising Activities

LO 15

Net Sales

Cost of Goods Sold

Gross Profit

Operating Expenses

Net Income Net Income

Operating Expenses

Revenues

Merchandiser Service Company

Computing Net IncomeComputing Net Income

© 2013 McGraw-Hill Ryerson Limited. LO 16

Products a company owns for the purpose of selling to customers. • It is often referred to as Merchandise

Inventory. • Is classified as a current asset.


InventoryInventory

LO 17

Cost of merchandise inventory includes:• Costs incurred to purchase the goods.• Shipping costs.• Other costs required to make goods ready

for sale.


Merchandise InventoryMerchandise Inventory

LO 18

Merchandising Cost FlowMerchandising Cost Flow


Beginning Merchandise

Inventory

Ending Merchandise

inventory

Cost of goodssold

LO 19

Net cost ofPurchases

Merchandise available for

sale

Perpetual Provides a continuous record of:• The amount of merchandise inventory on hand.• Cost of goods sold to date.

PeriodicRequires a physical count of goods to determine:• The amount of merchandise inventory on hand.• Cost of goods sold.


Merchandise Inventory SystemsMerchandise Inventory Systems

LO 210


Nov. 2 Merchandise Inventory 1,200 Accounts Payable 1,200 Purchased merchandise inv. on account

Nov.5 Accounts Payable 300 Merchandise Inventory 300

Purchase allowance re: debit memo

Purchases

Purchase Returns and Allowances

Perpetual System-Example

LO 311

Terms

Time

Due

Discount Period = 10 days

(Full amount minus 2% discount) due between

Nov.2 and Nov.12

Credit Period = 30 days

Full amount due anytime between Nov.13 and Dec.2

Purchase or Sale

Nov.2 Nov.12 Dec.2

Purchase/Sales DiscountsPurchase/Sales Discounts


A deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30

12

Purchase Discounts- Assume the purchase of merchandise inventory on November 2 was on the terms 2/10,n30.

Case 1-Discount taken


Nov.12 Accounts Payable 900 Merchandise Inventory 18 Cash 882 2% x (1,200 - 300) = 18

Case 2-Discount not taken

Nov.12 Accounts Payable 900 Cash 900

Perpetual System — Example

LO 313

Prepare journal entries for each of the following transactions. Assume a perpetual merchandise inventory system.

October 6: Purchased 650 units of merchandise inventory at $5 per unit.

The seller offered a cash discount of 2/10, n/30.

October 8: Returned 25 defective units and received full credit.

October 10:Paid the amount in full, less the returned items.


Mini-QuizMini-Quiz

LO 314

Mini-QuizMini-Quiz

Oct.6 Merchandise Inventory 3,250 A/P 3,250 (650 x 5)

8 A/P 125 Merchandise Inventory 125 (25 x 5)

11 A/P 3,125 Merchandise Inventory 62.50 Cash 3,062.50 (3,250-125) x 2%


FOB Shipping Point(Buyer pays

shipping charges)

FOB Destination(Seller pays for

shipping charges)

GoodsSeller Buyer

Carrier

Transportation Charges – Transportation Charges – Perpetual SystemPerpetual System


Transportation Costs


Nov.24 Merchandise Inventory 75 Cash 75

Paid freight charges on purchased merchandise.


LO 317

Sales of Merchandise


Nov.12 Accounts Receivable 1,000 Sales 1,000 Sold merchandise on terms 2/10,n60

Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold


LO 318

Customer Payment

Case 1-Customer pays in 60 days

Case 2-Customer pays in 10 days


Jan.11 Cash 1,000 Accounts receivable 1,000 Received payment for Nov. 12 sale


LO 3

Nov.22 Cash 980

Sales discounts 20

Accounts receivable 1,000 Received payment less the discount

19

Sales Returns and Allowances


Nov.6 Sales Returns & Allowance 800 Accounts Receivable 800 Customer returned merchandise

Merchandise Inventory 600 Cost of Goods Sold 600 Returned goods to merchandise inventory


LO 320

• Perpetual merchandise inventory systems keep a running total of inventory levels by recording sales and purchase transactions.

• Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of merchandise inventory).


Adjustments-Adjustments- Perpetual Merchandise InventoryPerpetual Merchandise Inventory

LO 421

Inventory per accounting records: $21,250

Inventory per physical count: -$21,000

Difference (shrinkage) $250

Adjustment required:



Dec.31 Cost of Goods Sold 250 Merchandise Inventory 250

To record inventory shrinkage revealed by physical count.

LO 4

22

Income statements may be formatted in a variety of ways.

Typical formats are:• Classified, Multiple-Step • Multiple-Step• Single-Step


Income Statement FormatsIncome Statement Formats

LO 523

Sales 321,000$ Less: Sales discounts 4,300$

Sales returns and allowances 2,000 6,300 Net sales 314,700 Cost of goods sold 230,400 Gross profit 84,300 Operating expenses: Selling expenses:

Sales salaries expense 18,500$ Advertising expense 11,300 Rent expense, selling space 8,100 Depreciation expense, store equipment 3,000 Store supplies expense 1,200

Total selling expenses 42,100$ General and administrative expenses:

Office salaries expense $25,300Office supplies expense 1,800 Rent expense,office space 900 Depreciation expense, office equipment 700 Insurance expense 600 Total general and administrative expenses 29,300

Total operating expenses 71,400

Income from operations 12,900$ Other revenues and expenses:

Rent revenue 2,800$ Interest expense (360) 2,440

Net income 15,340$

MECIncome Statement

For Year Ended December 31, 2014

Classified Multi-step

Format

(for internal reporting)


24

Sales, net 314,700$ Cost of goods sold 230,400 Gross profit 84,300 Operating expenses:

Sales salaries expense 43,800$ Advertising expense 11,300 Rent expense 9,000 Depreciation expense 3,700 Supplies expense 3,000 Insurance expense 600 Total operating expense 71,400

Income from operations 12,900$ Other revenues and expenses:

Rent revenue 2,800 Interest expense (360) 2,440

Net income 15,340$

MECIncome Statement


Multi-step Format

(for external reporting)


Revenues:Net 314,700$ Rent revenue 2,800 Total revenues 317,500

Expenses:Cost of goods sold 230,400$ Selling expense 42,100 General and administrative expense 29,300 Interest expense 360 Total expenses 302,160

Net income 15,340$

MECIncome Statement


Single- step

Format

(for external reporting)


• The amount of gross profit expressed as a percentage of net sales.

• May be tracked over time and/or compared to similar businesses.

• May be calculated for whole business, departments, products.


Gross Profit RatioGross Profit Ratio

Gross profit from sales

Net sales

Gross profit ratio =

X 100%

LO 527

• The closing process is similar for merchandising and service companies.

• Merchandising companies have additional temporary accounts that must be closed. These include:• Sales• Sales Returns & Allowances• Sales Discounts• Cost of Goods Sold


Closing Entries-Perpetual SystemClosing Entries-Perpetual System

LO 628

Q Identify and explain the components of income for a merchandising company.

A The basic components of income start with net sales. From net sales is subtracted the cost of goods sold. The resulting amount is called gross profit or gross margin. Selling and general and administrative expenses are subtracted from gross profit to determine income from operations.


ReviewReview

29

Q Explain the difference between single-step and multiple-step income statements.

A A single-step income statement format includes cost of goods sold as an operating expense, and shows only one subtotal for total expenses. Operating expenses are highly summarized.

A multiple-step income statement shows intermediate totals between sales and net income. It also includes detailed computations of net sales and cost of goods sold.


ReviewReview

30

Periodic systems

Merchandise Inventory is updated at the end of the period based on a physical count.

Perpetual systems

Merchandise Inventory is updated after each sale or purchase.


Appendix 5A- Periodic and Perpetual Appendix 5A- Periodic and Perpetual Merchandise Inventory Systems Merchandise Inventory Systems

ComparedCompared

LO 731

Appendix 5A - Example


Purchase of Merchandise

Return of Merchandise

Periodic System Perpetual System

LO 732

Purchases 1200 Merchandise Inventory 1200 Accounts Payable 1200 Accounts Payable 1200

Accounts Payable 300 Accounts Payable 300 Purchase Returns 300 Merchandise Inventory 300



Purchase Discount Taken (2/10, n30)

Transportation Charges


LO 733

Accounts Payable 900 Accounts Payable 900 Purchase Discounts 18 Merchandise Inventory 18 Cash 882 Cash 882

Transportation-in 75 Merchandise Inventory 75 Cash 75 Cash 75



Sale of merchandise


LO 734

Accounts Receivable 2400 Accounts Receivable 2400 Sales 2400 Sales 2400

Cost of Goods Sold 1600 Merchandise Inventory 1600



Sales Return


LO 735

Sales Returns & Allow. 800 Sales Returns & Allow. 800 Accounts Receivable 800 Accounts Receivable 800

Merchandise Inventory 600 Cost of Goods Sold 600

Provincial Sales Tax (PST)

A consumption tax applied on sales to the final consumers of products or services.

•Is not applicable to all sales.

•Varies from province to province.

•Amount collected is a liability.

Appendix 5B – Sales TaxAppendix 5B – Sales Tax


Goods and Services Tax (GST)

A 5% tax on almost all goods and services provided in Canada.

•Is ultimately paid by the final consumer.

•Is uniform from province to province.

•Amount collected by a business is a liability.

•Amount paid by a business offsets the GST owing.

Appendix 5B - Sales TaxAppendix 5B - Sales Tax


Harmonized Sales Tax (HST)

Is a combined GST and PST rate applied to taxable supplies.

Appendix 5B - Sales TaxAppendix 5B - Sales Tax


Appendix 5B - Example

Purchase of Merchandise Assume: Perpetual system and 5% GST.


Merchandise Inventory 600 GST Receivable 30 Accounts Payable 630

LO 839

Appendix 5B - Example

Sale of Merchandise Assume: Perpetual system, 7% PST and 5% GST.


Accounts Receivable 1,008 Sales 900 PST Payable 63 GST Payable 45 To record sale of merchandise

Cost of goods sold 600 Merchandise Inventory 600 To record cost of merchandise sold

LO 840

accounting for merchandising activities powerpoint slides to accompany fundamental accounting...

Documents

mcgrawhill ryerson limited

cost of merchandise

merchandise purchases

purchased merchandise

merchandising company

sale slide

perpetual inventory

net sales cost of goods