acct 201 acct 201 acct 201 reporting and analyzing merchandising activities uaa – acct 201...

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Reporting and Analyzing Merchandising Activities

UAA – ACCT 201 Principles of Financial

Accounting Dr. Fred Barbee

Chap

ter 4

Periodic Inventory Method

Purchases

Accts. Payable

Inventory

BI xxx

xxx

xxx

Pur. R&A

xxx

Pur. Disc.

xxx

When Inventory is Purchased

The Inventory Account is not updated when inventory is

purchased.

Perpetual Inventory Method

Purchases

Accts. Pay

Pur. R&A

Pur. Disc.

Inventory

xxx

xxx

xxx

xxx

xxx

COGS

xxx

xxx

When Purchased

When Sold

Perpetual Inventory Method

Sales

Accts. Rec.

Inventory

xxx

xxx

COGS

xxx

xxx

When Sale is made

Match COGS

Sales R&A

xxx

Sales Disc.

xxx

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Additional Merchandising Issues

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Adjusting Entries

Prepaid Expenses

Depreciation

Unearned Revenue

Accrued Expenses

Accrued Revenue-

There’s more!

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Perpetual Systems – Inventory Shrinkage

Shrinkage is defined as “the loss of inventory.”

Usually charged to cost of goods sold.

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Inventory Shrinkage – Text Example

Suppose that Z-Mart’s Inventory account at year-end 2002 has a balance of $21,250, but that a physical count reveals only $21,000 of inventory on hand.

GENERAL JOURNAL Page 49Date Description PR Debit Credit

Dec 31 Cost of Goods Sold 250

Merchandise Inventory 250

To adjust for $250 inventory shrinkage

revealed by physical inventory count.

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Closing Entries

Close the Revenue Accounts

Close the Expense Accounts

Close the Income Summary

Close the Dividends Account

There’s more!

We have some new accounts

Close these with the expense accounts.

Let’s prepare theclosing entries for

Bob’s Shop for Men.

Step 1: Close the Revenue Accounts to Income Summary.

GENERAL JOURNAL Page87Date Description PR Debit Credit

Dec. 31 Sales 323,800

Income Summary 323,800

Step 2: Close the Expense Accounts to Income Summary.

GENERAL JOURNAL Page 87Date Description PR Debit Credit

Dec. 31 Income Summary 310,900

Sales Discounts 4,300

Sales Returns 2,000

Cost of Goods Sold 233,200

Adm. Salaries Exp. 18,200

Sales Salaries Exp. 29,600

Insurance Expense 1,200

Rent Expense 8,100

Supplies Expense 1,000

Advertising Expense 13,300

Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

GENERAL JOURNAL Page 87Date Description PR Debit Credit

Dec. 31 Income Summary 310,900

Sales Discounts 4,300

Sales Returns 2,000

Cost of Goods Sold 233,200

Adm. Salaries Exp. 18,200

Sales Salaries Exp. 29,600

Insurance Expense 1,200

Rent Expense 8,100

Supplies Expense 1,000

Advertising Expense 13,300

Step 3: Close Income Summary to Retained Earnings

GENERAL JOURNAL Page87Date Description PR Debit Credit

Dec. 31 Income Summary 12,900

Retained Earnings 12,900

Inventory Systems

+

+

Beginninginventory

Net cost ofpurchases

Merchandiseavailable for sale

Ending Inventory

Cost of GoodsSold

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Merchandising Cost Accounts

+

+

Beginninginventory

Year 1

Beginninginventory

Year 1

Net cost ofpurchasesNet cost ofpurchases

Merchandiseavailable for sale Merchandiseavailable for sale

Ending Inv.Year 1

Ending Inv.Year 1

Cost of GoodsSold

Cost of GoodsSold

=

Income Statemen

t

Becomes beginning inventory of Year 2Becomes beginning inventory of Year 2

BalanceSheet

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Income Statement Formats

Multiple-StepMultiple-Step

Single-StepSingle-Step

Multiple-StepMultiple-Step

Single-StepSingle-Step

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Single-Step Income Statement

Multiple-Step Income Statement

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Merchandising Cash Flows

Income Statement Statement of Cash FlowsNet Sales Receipts from CustomersCost of Goods Sold Payments to SuppliersGross Profit Net Cash Flows from Customers and Suppliers

Exhibit 4-19

Accrual-Based

Cash-Based

Acid-Test Ratio

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

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Gross Margin Ratio

Percentage of dollar sales available to

cover expenses and

provide a profit.

Gross Margin Ratio

=

Net Sales – Cost of Goods Sold

Net Sales