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Accounting for Merchandising Operations
Chapter 4
Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
Wild, Shaw, and ChiappettaFinancial & Managerial Accounting6th Edition
04-C1:Describe merchandising
activities and identify income components for a
merchandising company.
2
5- 3
Service organizations sell time to earn revenue.
Examples: Accounting firms and plumbing services
Service organizations sell time to earn revenue.
Examples: Accounting firms and plumbing services
Service Companies vs. Merchandising Companies
3
A merchandiser earns net income by buying and selling merchandise.
C 1
5- 4
Manufacturer Wholesaler Retailer Consumers
Merchandising Companies
Merchandiser
C 14
5- 5
C 1
Reporting Income for a Merchandiser
Merchandising companies sell products to earn revenue.
Examples: sporting goods, clothing, and auto parts stores
5
Exhibits 4.1 &
4.2
04-C2:Identify and explain the
inventory asset and cost flows of a merchandising company.
6
5- 7
Operating Cycle for a Merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of
merchandise.
C 27
Exhibit 4.3
5- 8
Inventory Systems
C 28
Exhibit 4.4
5- 9
Perpetual systems continually update
accounting records for merchandising transactions
Periodic systemsaccounting records
relating to merchandise transactions are updated only at the end of the accounting period
C 2
Inventory Systems
9
04-P1:Analyze and record
transactions for merchandise purchases using a perpetual
system.
10
Merchandise Purchases
On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.
P111
Trade Discounts
P112
Exhibit 4.5
5- 13
Purchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
P113
Exhibit 4.6
5- 14
2/10, n/30Discount Percent
Number of Days
Discount Is Available
Otherwise, Net (or All) Is Due in 30
Days
CreditPeriod
Purchase Discounts
P114
5- 15
On November 2, Z-Mart purchased $1,200 of merchandise inventory on account,
credit terms are 2/10, n/30.
Purchase Discounts
P115
5- 16
On November 12, Z-Mart paid the amount due on the purchase of November 2.
Purchase Discounts
P116
Since payment was made within the discount period, a $24 discount ($1,200 x 2%) is taken.
5- 17
Purchase Discounts
After we post these entries, the accounts involved look like these:
P117
5- 18
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.
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.
P118
5- 19
On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from
Trex for defective merchandise.
Purchase Returns and Allowances
P119
5- 20
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
P120
5- 21
Transportation Costs and Ownership Transfer
P121
Exhibit 4.7
5- 22
Transportation Costs
Z-Mart purchased merchandise on terms of FOB shipping point. The transportation
charge is $75.
P122
Since freight terms were FOB shipping point, Z-mart is responsible for the freight charges. We increase Merchandise Inventory for the cost of the freight.
5- 23
Accounting for Merchandise
P123
Exhibit 4.8
NEED-TO-KNOW (4-1)
Oct. 1
Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7.Oct. 31
Prepare journal entries to record each of the following purchases transactions of a merchandising company. Assume a perpetual inventory system.
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31.
P1
P124
NEED-TO-KNOW (4-1)Oct. 1
Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.Oct. 11 Paid the amount due from the October 1 purchase, less the return on October 7.
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Oct. 1 500 Oct. 1 500Oct. 3 30 Oct. 7 200
Oct. 7 200 Oct. 11 300Oct. 11 6
Oct. 31 324
Date Debit CreditOct. 1 Merchandise inventory (125 units @ $4) 500
Accounts payable 500
Oct. 3 Merchandise inventory 30Cash 30
Oct. 7 Accounts payable (50 units @ $4) 200Merchandise inventory (50 units @ $4) 200
Oct. 11 Accounts payable 300Merchandise inventory ($300 x .02) 6Cash 294
General Journal
Merchandise inventory Accounts payable
P125
NEED-TO-KNOWOct. 1
Oct. 3 Paid $30 cash for freight charges from UPS for the October 1 purchase.Oct. 7 Returned 50 defective units from the October 1 purchase and received full credit.
Purchased 125 units of a product at a cost of $4 per unit. Terms of the sale are 2/10, n/30, and FOB shipping point; the invoice is dated October 1.
Oct. 31 Assume the October 11 payment was never made and, instead, payment of the amount due on the October 1 purchase, less the return on October 7, occurred on October 31.
Oct. 1 500 Oct. 1 500Oct. 3 30 Oct. 7 200
Oct. 7 200 Oct. 31 300
Oct. 31 330
Date Debit CreditOct. 1 Merchandise inventory (125 units @ $4) 500
Accounts payable 500
Oct. 3 Merchandise inventory 30Cash 30
Oct. 7 Accounts payable 200Merchandise inventory (50 units @ $4) 200
Oct. 31 Accounts payable 300Cash 300
General Journal
Merchandise inventory Accounts payable
P126
04-P2:Analyze and record
transactions for merchandise sales using a perpetual system.
27
5- 28
Accounting for Merchandise Sales
P228
Exhibit 4.9
5- 29
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.
29
5- 30
Z-Mart sold $2,400 of merchandise on credit. The merchandise has a cost basis to Z-Mart of
$1,600.
Sales of Merchandise
P230
Two entries are required:1) Records the revenue 2) Records the cost
5- 31
Sales Discounts
P2
Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future
collection efforts.
31
5- 32
Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.
Sales Discounts
P2
Option 1: The account was paid in full within the 60-day period.
Option 2: The account was paid in full within the 10-day discount period.
32
5- 33
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.
33
5- 34
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
P234
Two entries are required:1) Records the reduction in revenue 2) Records the return of goods to
inventory
5- 35
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 Allowances
P235
One entry is required:1) Records the reduction in revenue
Contra Revenue account
NEED-TO-KNOW (4-2)
Jun. 1
Jun. 7
Jun. 8
Jun. 11
The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory.The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage.
Prepare journal entries to record each of the following sales transactions of a merchandising company. Assume a perpetual inventory system.
Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit.
The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate.The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory
P236
NEED-TO-KNOW (4-2)Jun. 1
Jun. 7
Date Debit CreditJun. 1 Accounts receivable 7,000
Sales (500 @ $14) 7,000
Jun. 1 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000
Jun. 7 Sales returns and allowances (20 @ $14) 280Accounts receivable 280
Jun. 7 Merchandise inventory (20 @ $10) 200Cost of goods sold 200
General Journal
The customer returns 20 units because those units did not fit the customer’s needs. The seller restores those units to its inventory.
Sold 500 units of merchandise to a customer for $14 per unit under credit terms of 2/10, n/30, FOB shipping point, and the invoice is dated June 1. The merchandise had cost $10 per unit.
P237
NEED-TO-KNOW (4-2)Jun. 8
Jun. 11
The customer discovers that 30 units are damaged but are still of some use and, therefore, keeps the units because the seller sends the buyer a credit memorandum for $90 to compensate for the damage.The customer discovers that 10 units are the wrong color, but keeps 8 of these units because the seller sends a $12 credit memorandum to compensate.The customer returns the remaining 2 units to the seller. The seller restores the 2 returned units to its inventory
Date Debit CreditJun. 1 Accounts receivable 7,000
Sales (500 @ $14) 7,000
Jun. 01 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000
Jun. 07 Sales returns and allowances (20 @ $14) 280Accounts receivable 280
Jun. 07 Merchandise inventory (20 @ $10) 200Cost of goods sold 200
Jun. 08 Sales returns and allowances 90Accounts receivable 90
Jun. 11 40Accounts receivable 40
Jun. 11 Merchandise inventory (2 @ $10) 20Cost of goods sold 20
General Journal
Sales returns and allowances ($12 + (2 @ $14))
P238
NEED-TO-KNOW (4-2)
Date Debit CreditJun. 1 Accounts receivable 7,000
Sales (500 @ $14) 7,000
Jun. 01 Cost of goods sold (500 @ $10) 5,000Merchandise inventory 5,000
Jun. 07 Sales returns and allowances (20 @ $14) 280Accounts receivable 280
Jun. 07 Merchandise inventory (20 @ $10) 200Cost of goods sold 200
Jun. 08 Sales returns and allowances 90Accounts receivable 90
Jun. 11 40Accounts receivable 40
Jun. 11 Merchandise inventory (2 @ $10) 20Cost of goods sold 20
General Journal
Sales $7,000Sales returns and allowances $410Sales discounts 0 (410)Net sales 6,590Cost of goods sold 4,780Gross profit on sales $1,810
Partial income statement
Sales returns and allowances ($12 + (2 @ $14))
P239
04-P3:Prepare adjustments and close accounts for a merchandising
company.
40
Merchandising Cost Flow in the Accounting Cycle
P341
Exhibit 4.10
5- 42
Adjusting Entries for Merchandisers
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.
42
5- 43
Closing Entries for Merchandisers
P343
Exhibit 4.11
NEED-TO-KNOW (4-3)
Merchandise inventory $756 Sales returns and allowances $130Retained Earnings 2,306 Cost of goods sold 2,100Dividends 140 Depreciation expense 206Sales 3,204 Salaries expense 650Sales discounts 94 Other operating expenses 100
Debit CreditMerchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100
A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts.
P344
NEED-TO-KNOW (4-3)
Debit CreditMerchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100
A merchandising company’s ledger on May 31, its fiscal year-end, includes the following selected accounts that have normal balances (it uses the perpetual inventory system). A physical count of its May 31 year-end inventory reveals that the cost of the merchandise inventory still available is $718. (a) Prepare the entry to record any inventory shrinkage. (b) Prepare journal entries to close the balances in temporary revenue and expense accounts.
Date Debit CreditMay 31 Cost of Goods Sold 38
Merchandise inventory ($756 - $718) 38
General Journal
$718
2,138
P345
To adjust for inventory shrinkage.
NEED-TO-KNOW (4-3)Debit Credit
Merchandise inventory $756Retained Earnings $2,306Dividends 140Sales 3,204Sales discounts 94Sales returns and allowances 130Cost of goods sold 2,100Depreciation expense 206Salaries expense 650Other operating expenses 100
$718
2,138
Date Debit CreditMay 31 Sales 3,204
Income Summary 3,204
May 31 Income Summary 3,318Sales discounts 94Sales returns and allowances 130Cost of Goods Sold ($2,100 + $38) 2,138Depreciation expense 206Salaries expense 650Other operating expenses 100
General Journal
P346
04-P4:Define and prepare multiple-step and single-step income
statements.
47
5- 48
P448
Exhibit 4.13
5- 49
Single-Step Income Statement
P449
Exhibit 4.14
5- 50
Classified Balance Sheet
HighlyLiquid
LessLiquid
P450
Exhibit 4.15
5- 51
51
Merchandise inventory 820$ Other (noninventory) assets 2608total liabilities 500$ Common stock 400Retained earnings 1691Dividends 160Sales 4512Sales discounts 45Sales returns and allowances 240Cost of goods sold 1490Sales salaries expense 640Rent expense--Selling space 160Store supplies expense 30Advertising expense 260Office salaries expense 570Rent expense--Office space 72Office supplies expense 8Totals 7,103$ 7,103$
Debit Credit
Prepare a multiple-step income statement that includes separate categories for selling expenses and for general and administrative expenses. (b) Prepare a single-step income statement that includes these expense categories: cost of goods sold, selling expenses, and general and administrative expenses.
NEED-TO-KNOW
P4
Assume Target’s adjusted trial balance on April 30, 2015, its fiscal year-end, appears below.
NEED-TO-KNOW
Sales $4,512Less: Sales discounts $45
Sales returns and allowances 240 285Net sales 4,227Cost of goods sold 1,490Gross profit 2,737ExpensesSelling expensesSales salaries expense 640Rent expense - Selling space 160Store supplies expense 30Advertising expense 260Total selling expenses 1,090
General and administrative expensesOffice salaries expense 570Rent expense - Office space 72Office supplies expense 8Total general and administrative expenses 650
Total expenses 1,740Net income $997
TARGET
For Year Ended April 30, 2015Income Statement
P452
Merchandise inventory 820$ Other (noninventory) assets 2608total liabilities 500$ Common stock 400Retained earnings 1691Dividends 160Sales 4512Sales discounts 45Sales returns and allowances 240Cost of goods sold 1490Sales salaries expense 640Rent expense--Selling space 160Store supplies expense 30Advertising expense 260Office salaries expense 570Rent expense--Office space 72Office supplies expense 8Totals 7,103$ 7,103$
Debit Credit
NEED-TO-KNOW
Sales $4,512 Net sales $4,227Less: Sales discounts $45 Expenses
Sales returns and allowances 240 285 Cost of goods sold 1,490Net sales 4,227 Selling expenses 1,090Cost of goods sold 1,490 General and administrative expenses 650Gross profit 2,737 Total expenses 3,230Expenses Net income $997Selling expensesSales salaries expense 640Rent expense - Selling space 160Store supplies expense 30Advertising expense 260Total selling expenses 1,090
General and administrative expensesOffice salaries expense 570Rent expense - Office space 72Office supplies expense 8Total general and administrative expenses 650
Total expenses 1,740Net income $997
TARGET
For Year Ended April 30, 2015Income Statement
TARGETIncome Statement
For Year Ended April 30, 2015
P453
5- 54
Global ViewAccounting for Merchandise Purchases and Sales
Both U.S. GAAP and IFRS include broad and similar guidance for the accounting of merchandise purchases and sales.
Income Statement PresentationBoth U.S. GAAP and IFRS income statements begin with the net sales or net revenues (top line) item. For merchandisers and manufacturers, this
is followed by cost of goods sold. The presentation is similar for the remaining items with the following differences.
1. Order of expenses2. Separate disclosures3. Presentation of expenses4. Operating Income5. Alternative income
54
04-A1:Compute the acid-test ratio and explain its use to assess
liquidity.
55
5- 56
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 + short term investments+ Receivables
Current liabilities
Acid-Test (Quick) Ratio
A156
Exhibit 4.16
5- 57
JCPenney’sAcid Test and Current Ratios
A157
Exhibit 4.17
04-A2:Compute the gross margin ratio and explain its use to
assess profitability.
58
5- 59
Percentage of dollar sales available to
cover expenses and provide a profit.
Grossmarginratio
Net sales - Cost of goods sold Net sales
=
Gross Margin Ratio
A259
Exhibit 4.18
JC Penny’sGross Margin Ratio
60
Exhibit 4.19
A2
04-P5: (Appendix 4A)Record and compare
merchandising transactions using both periodic and
perpetual inventory systems.
61
5- 62
Appendix 4A: 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)
62
5- 63
Appendix 4A: Comparison of Adjusting and Closing Entries--Periodic vs. Perpetual Inventory System
P563
Exhibit 4A.1
5- 64
04-P5: (Appendix 4B)The worksheet--perpetual
inventory systems.
64
5- 65
Appendix 4B: Work Sheet—Perpetual System
P565
Exhibit 4B.1
5- 66
End of Chapter 4
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