mcgraw-hill/irwin © the mcgraw-hill companies, inc., 2005 4-1 chapter 4 reporting and analyzing...
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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005
4-1
Chapter 4Chapter 4
Reporting and Analyzing Merchandising Operations
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
4-2
Merchandising ActivitiesMerchandising Activities
Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.
Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services
Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.
Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services
RevenuesRevenues ExpensesExpensesMinus Net
incomeNet
incomeEquals
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Manufacturer Wholesaler Retailer Customer
Merchandising CompaniesMerchandising Companies
Merchandising ActivitiesMerchandising Activities
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Reporting Income of a MerchandiserReporting Income of a Merchandiser
Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts
stores
Cost ofGoods Sold
GrossProfit
ExpensesNet
IncomeNet
SalesMinus Equals Minus Equals
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Operating Cycle for a MerchandiserOperating Cycle for a Merchandiser
Begins with the purchase of merchandise and ends with the collection of cash from the sale of
merchandise.
Purchases
Merchandiseinventory
Credit sales
Accountreceivable
CashcollectionPurchases
Merchandiseinventory
Cashsales
Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale
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Inventory SystemsInventory Systems
+
+
BeginninginventoryBeginninginventory
Net cost ofpurchasesNet cost ofpurchases
Merchandiseavailable for sale Merchandiseavailable for sale
Ending inventoryEnding inventoryCost of goods
soldCost of goods
sold
==
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4-7
Merchandise PurchasesMerchandise Purchases
On June 20, Jason, Inc. purchased $14,000 of Merchandise inventory paying cash.
On June 20, Jason, Inc. purchased $14,000 of Merchandise inventory paying cash.
Jun. 20 Merchandise Inventory 14,000 Cash 14,000
Purchase merchandise for cash
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4-8
Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/05 358-BI
Sold To
Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501
P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$
Sub Total 27,000 We appreciate your business! Ship Chg. -
Tax - Total 27,000$
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount
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Trade DiscountsTrade Discounts
Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000
units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each
Racer has a list price of $5.25.Racer has a list price of $5.25.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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Purchase DiscountsPurchase Discounts
A deduction from the invoice price granted to induce early payment of the amount due.
A deduction from the invoice price granted to induce early payment of the amount due.
Terms
Time
Due
Discount Period
Full amountless discount
Credit Period
Full amount due
Purchase or SalePurchase or Sale
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2/10,n/302/10,n/30
Purchase DiscountsPurchase Discounts
Discount Percent
Discount Percent
Number of Days
Discount Is Available
Number of Days
Discount Is Available
Otherwise, Net (or All)
Is Due
Otherwise, Net (or All)
Is Due CreditPeriod
CreditPeriod
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4-12
Purchase DiscountsPurchase Discounts
On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit
terms are 2/10, n/30.
On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit
terms are 2/10, n/30.
May 7 Merchandise Inventory 27,000 Accounts Payable 27,000
Purchase merchandise on account
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Purchase DiscountsPurchase Discounts
On May 15, Jason, Inc. paid the amount due on the purchase of May 7.
On May 15, Jason, Inc. paid the amount due on the purchase of May 7.
$27,000 × 2% = $540 discount
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Purchase DiscountsPurchase Discounts
After we post these entries, the accounts involved look like this:
After we post these entries, the accounts involved look like this:
Merchandise Inventory Accounts Payable 5/7 27,000 5/7 27,0005/15 540 5/15 27,000
Bal. 26,460 Bal. 0
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Not Paid Within the Discount PeriodNot Paid Within the Discount Period
If we fail to take a 2/10, n/30 discount, is it really expensive?If we fail to take a 2/10, n/30 discount, is it really expensive?
365 days ÷ 20 days × 2% = 36.5% annual rate 365 days ÷ 20 days × 2% = 36.5% annual rate
Daysin ayear
Daysin ayear
Numberof additionaldays before
payment
Numberof additionaldays before
payment
Percentpaid to keep
money
Percentpaid to keep
money
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Purchase Returns and AllowancesPurchase Returns and Allowances
Purchase Return . . .
Merchandise returned by the purchaser to the supplier.
Purchase Allowance . . .
A reduction in the cost of defective 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 merchandise received by a purchaser from a supplier.
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Purchase Returns and AllowancesPurchase Returns and Allowances
On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit
terms are 2/10, n/30.
On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit
terms are 2/10, n/30.
May 9 Merchandise Inventory 20,000 Accounts Payable 20,000
Purchased merchandise on account
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Purchase Returns and AllowancesPurchase Returns and Allowances
On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.
On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.
May 10 Accounts Payable 500 Merchandise Inventory 500
Returned defective merchandise
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Purchase Returns and AllowancesPurchase Returns and Allowances
On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.
On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.
May 18 Accounts Payable 19,500 Cash 19,110 Merchandise Inventory 390
Paid account in full
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Transportation CostsTransportation Costs
FOB shipping point(buyer pays)
FOB destination(seller pays)
Merchandise
Seller Buyer
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Transportation CostsTransportation Costs
On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid
$100 transportation costs.
On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid
$100 transportation costs.
May 12 Merchandise Inventory 8,100 Cash 8,100
Paid for merchandise and transportation
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Quick Check Quick Check
On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The
shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will
be part of Buyer’s July 6 journal entry?
a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450
On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The
shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will
be part of Buyer’s July 6 journal entry?
a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450
FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with
a debit to Merchandise Inventory.
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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Cost of Merchandise PurchasedCost of Merchandise Purchased
Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (10,388) Purchase returns and allowances (4,275) Add: Cost of transportation-in 4,895 Total cost of merchandise purchases 682,732$
Matrix, Inc.Total Cost of Merchandise Purchases
For Year Ended May 31, 2005Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (10,388) Purchase returns and allowances (4,275) Add: Cost of transportation-in 4,895 Total cost of merchandise purchases 682,732$
Matrix, Inc.Total Cost of Merchandise Purchases
For Year Ended May 31, 2005
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Accounting for Merchandise SalesAccounting for Merchandise Sales
Sales discounts and returns and allowances are Contra Revenue accounts.Sales discounts and returns and allowances are Contra Revenue accounts.
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Sales of MerchandiseSales of Merchandise
On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was
carried in inventory at a cost of $18,000.
On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was
carried in inventory at a cost of $18,000.
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Sales DiscountsSales Discounts
On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.
Let’s prepare the journal entries.Let’s prepare the journal entries.
On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.
Let’s prepare the journal entries.Let’s prepare the journal entries.
Jun. 8 Accounts Receivable 6,000 Sales 6,000
Sales of merchandise on credit
Cost of Goods Sold 3,500 Merchandise Inventory 3,500
To record cost of sales
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Sales DiscountsSales Discounts
On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.
On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.
Jun. 17 Cash 5,880 Sales Discount 120
Accounts Receivable 6,000 Received payment less discount
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Sales Returns and AllowancesSales Returns and Allowances
On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The
credit terms were 2/10, n/30.
On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The
credit terms were 2/10, n/30.
Jun. 12 Accounts Receivable 7,500 Sales 7,500
Sales of merchandise on credit
Cost of Goods Sold 4,000 Merchandise Inventory 4,000
To record cost of sales
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Sales Returns and AllowancesSales Returns and Allowances
On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is
related to the June 12 sale.
On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is
related to the June 12 sale.
Jun. 14 Sales Returns and Allowances 800 Accounts Receivable 800
Customer returned merchandise
Merchandise Inventory 470 Cost of Goods Sold 470
Returned goods placed in inventory
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Sales Returns and AllowancesSales Returns and Allowances
On June 20, Barton received the amount owed to it from the sale of June 12.
On June 20, Barton received the amount owed to it from the sale of June 12.
Jun. 20 Cash 6,566 Sales Discount 134
Accounts Receivable 6,700 Received payment less discount
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Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for
Barton.
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Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.
Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.
Dec. 31 Sales 323,800 Income summary 323,800
To close credit balances in temporary accounts
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Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.
Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.
Dec. 31 Income Summary 310,900 Sales Discounts 4,300 Sales Returns 2,000 Cost of Goods Sold 233,200 Adm. Salaries Expense 18,200 Sales Salaries Expense 29,600 Insurance Expense 1,200 Rent Expense 8,100 Supplies Expense 1,000 Advertising Expense 13,300
To close debit balances in temporary accounts
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Step 3:Step 3: Close Income Summary to Retained Earnings
Step 3:Step 3: Close Income Summary to Retained Earnings
Dec. 31 Income Summary 12,900 Retained Earnings 12,900
To close Income Summary account
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Step 4:Step 4: Close Dividends to Retained Earnings.Step 4:Step 4: Close Dividends to Retained Earnings.
Dec. 31 Retained Earnings 4,000 Dividends 4,000
To close the withdrawals account
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Income Statement FormatsIncome Statement Formats
Multiple-StepMultiple-Step
Single-StepSingle-Step
Multiple-StepMultiple-Step
Single-StepSingle-Step
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Multiple-Step Income StatementMultiple-Step Income Statement
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Single-Step Income StatementSingle-Step Income Statement
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Classified Balance SheetClassified Balance Sheet
Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200
Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2005
Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200
Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$
Assets Liabilities
Merchandising CompanyBalance Sheet
December 31, 2005
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Acid-Test RatioAcid-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.
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 AssetsQuick Assets Current LiabilitiesCurrent Liabilities
Acid-TestAcid-TestRatioRatio
Acid-TestAcid-TestRatioRatio ==
Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current LiabilitiesCurrent Liabilities
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Gross Margin RatioGross Margin Ratio
Percentage of dollar sales
available to cover expenses and
provide a profit.
GrossMarginRatio
Net Sales - Cost of Goods Sold
Net Sales
=
© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin
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End of Chapter 4End of Chapter 4
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