chapter 5 2 co. a co. b revenue30,000100,000 operating expenses25,000 25,000
TRANSCRIPT
Chapter 5
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CO. A CO. B
REVENUE30,000 100,000
OPERATING EXPENSES 25,000 25,000
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SERVICERETAIL
REVENUE30,000 100,000
OPERATING EXPENSES 25,000 25,000
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SERVICERETAIL
REVENUE30,000 SALES 100,000COGS (70,000)
OPERATING EXPENSES 25,000 25,000NET INCOME 5,000 5,000
THE DIFFERENCES BETWEEN A SERVICE ENTERPRISE AND A MERCHANDISING COMPANY
Merchandising companies buy and sell merchandise
Service enterprises perform services as their primary source of revenue
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Differences Between a Service Enterprise and a Merchandising Company
In a merchandising company, the primary source of revenues is the sale of merchandise, referred to as sales revenue or sales.
Unlike expenses for a service company, expenses for a merchandising company are divided into two categories: Cost of goods sold - the total cost of merchandise sold
during the period. Operating expenses - selling and administrative
expenses.
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Page 202 in book
SalesRevenue
Cost ofGoods Sold
GrossProfit
OperatingExpenses
Net Income (Loss)
Less
LessEquals
Equals
How Income is Measured in a Merchandising Company
Illustration 5-1
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Operating cycle of a company is...
the average time it takes to go from cash to cash in producing revenues.
TO
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Operating cycle of a merchandising company is...
ordinarily longer than than that of a service company;
purchase of merchandise and its sale lengthens the cycle.
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Receive Cash
Receive Cash
Perform Services
Buy Inventory
Sell Inventory
Service Company
Merchandising Company
Cash
Cash
AccountsReceivable
AccountsReceivable
MerchandiseInventory
Illustration 5-2
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Inventory SystemsPerpetual - detailed inventory system in
which the cost of inventory is maintained and the records continuously show the inventory that should be on hand
Periodic -inventory system in which detailed records are not maintained and the cost is goods sold is determined only at end of accounting period
electronic scanners
have enabled many
companies to install perpetual inventory systems
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What Is Charged to Merchandise Inventory?
All Costs of getting the inventory to the company and ready to sell +Freight-In +Special Permits
Only costs associated with merchandise purchased for resale - not assets acquired for use, such as supplies
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Merchandise PurchasesOn May 4 the company bought $ 3,800 worth of merchandise from PW Audio
Supply, Inc.
Task:Record the purchase by getting information from the Purchase Invoice.The Purchase Invoice is a copy of the sales invoice.
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•1. Seller•2.Invoice Date•3.Purchaser•4.Salesperson•5.Credit terms•6.Freight terms•7.Goods sold: catalog no.,description,quantity, price per unit•8.Total invoice price
Invoice No. 731
Address 125 Main StreetAttention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date5/4/01 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
Illustration 5-4
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,5003008Production ModelCircuits
A2547Z48
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Merchandise PurchasesOn May 4 the company bought $ 3,800 worth of merchandise from PW Audio
Supply, Inc.
GENERAL JOURNAL Debit Credit
May 4 Merchandise Inventory 3,800 Accounts Payable 3,800
To record goods purchased on account
Accounts Payable
Merchandise Inventory
May 4 3,800 May 4 3,800
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Purchases Returns and AllowancesOn May 8 the company returned $300 worth
of merchandise to PW Audio Supply, Inc.
GENERAL JOURNAL Debit Credit
May 8 Accounts Payable 300 Merchandise Inventory 300
To record goods returned that were purchased on account
Accounts Payable
Merchandise Inventory
May 4 3,800 May 4 3,800May 8 300 May 8 300
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Freight Costs - On Incoming Inventory
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Freight Costs - On Incoming InventoryOn May 6 the company paid $ 150 to have the merchandise inventory delivered to
them.
GENERAL JOURNAL Debit Credit
May 6 Merchandise Inventory 150
Cash 150
To record payment of freight.
Merchandise Inventory
May 4 3,800
Cash May 6 150May 8 300
May 6 150
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Freight Costs - On Outgoing Inventory
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Freight Costs-on outgoing inventoryOn May 6 the seller company paid $ 150 to have merchandise inventory delivered to
the buyer.
GENERAL JOURNAL Debit Credit
May 6 Freight-Out 150
Cash 150
To record payment of freight on goods sold.
Freight-Out Cash May 6 150May 6 150
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Purchase Discounts
•Credit terms of a purchase on account may permit the buyer to claim a cash discount for prompt payment.
•Credit terms specify the amount of cash discounts and the time period during which it is offered.
•2/10,n/30
•1/10 EOM
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Purchases Discounts
Review - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period
Original Invoice $3,800
-Returns 300
Amount due before discount $3,500
2% discount 70
Net due $3,430
Purchases DiscountsReview - Company purchased $3800 of merchandise and returned $300. The credit terms are 2/10, n/30 and the invoice was paid within the discount period.
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable 3,500
Cash 3,430 Merchandise Inventory 70
To record payment within discount period.
Accounts Payable
Merchandise Inventory
May 4 3,800
Cash May 4 3,800May 8 300 May 8 300
May 14 70 May 14 3,500
May 14 3430May 6 150
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Sales Invoice ...
a business document that provides written evidence of a credit sale.
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•1. Seller•2.Invoice Date•3.Purchaser•4.Salesperson•5.Credit terms•6.Freight terms•7.Goods sold: catalog no.,description,quantity, price per unit•8.Total invoice price
Invoice No. 731
Address 125 Main StreetAttention o f James Hoover, Purchasing Agent
Firm Name: Sauk Stero
City Chelsea State Illinois Zip 60915
Date 5/4/01 Salesperson Maone Terms 2/10,n/30 Freight Paid by Buyer
Catalog No. Description QTY Price Amount
Illustration 5-4
IMPORTANT: ALL RETURNS MUST BE MADE WITHIN 10 DAYS TOTAL $3,800
1,5003008Production ModelCircuits
A2547Z48
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Sales Revenues -Under a Perpetual System
are recorded when earned-revenue recognition principle
must be supported by a business document-written evidence
2 entries are made for each sale one to record sale one to record cost of merchandise sold
Sales - under a perpetual systemAssume a CASH sale of $ 2,200
For merchandise having a cost of $ 1,400
Cash 2,200
Sales 2,200
Cost of Goods Sold 1,400
Merch Inventory 1,400
Sales - under a perpetual systemAssume a CASH sale of $ 2,200
CashAccounts
ReceivableMerchandise
Inventory
Cost of Goods Sold
Sales Returns & AllowancesSales
May 4 2,200
May 4 2,200
May 4 1.400
May 4 1.400
For merchandise having a cost of $ 1,400
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Sales Returns and AllowancesFlip side of purchase returns and
allowanceOn buyer’s books
GENERAL JOURNAL Debit Credit
May 8 Accounts Payable 300 Merchandise Inventory 300
To record goods returned that were purchased on account
On seller’s books
GENERAL JOURNAL Debit Credit
May 8 Sales Returns and Allowance 300 Accounts Receivable 300
To record return of goods delivered to Sauk Stero
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Sales Returns and AllowancesOn seller’s books
GENERAL JOURNAL Debit Credit
May 8 Sales Returns and Allowance 300 Accounts Receivable 300
To record return of goods delivered to Sauk Stero
May 8 Inventory 150
Cost of Goods Sold 150
Record cost of goods returned
Sales - under a perpetual systemAssume a sale of $ 3,800 ON ACCOUNT
CashAccounts
ReceivableMerchandise
Inventory
Cost of Goods Sold
Sales Returns & AllowancesSales
May 4 3,800
May 4 2,400
May 2,400
For merchandise having a cost of $2,400
May 4 3,800
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What Is the Sales Returns and Allowances Account?
Contra Revenue Account to salesUsed to show how much came in on returns
and allowances
Excessive returns and allowances suggest:inferior merchandiseinefficiencies in filing orderserrors in billing customersmistakes in delivery or shipment of goods
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What Is the Sales Discount Account?
Contra Revenue Account to salesUsed to disclose amount of cash discounts
taken by customers
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Sales Discounts
Flip side of purchase discountsOn buyer’s books
GENERAL JOURNAL Debit Credit
May 14 Accounts Payable 3,500 Cash 3,430 Merchandise Inventory 70
To record payment within discount periodOn seller’s books
GENERAL JOURNAL Debit Credit
May 14 Cash 3,430 Sales Discounts 70
Accounts Receivable 3500
To record collection within discount period
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Two Forms OfIncome Statements
Single-step income statementMultiple-step income statement
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Single-Step Income Statement
One step… subtract total
expenses from total revenues
Revenues $10,000Expenses 3,000Net income $ 7,000
PW AUDIO, Inc.Single-step Income Statement
For the Year Ended December 31, 2001
Sales $460,000Interest Revenue 3,000Gain on Sale of equipment 600
Total Revenues $463,600
ExpensesCost of goods sold $316,000
Selling expenses 76,000Administrative expenses 38,000Interest expense 1,800Casualty Loss from vandalism 200Income tax expense 10,100
Total expenses 442,100Net income $ 21,500
Illustration 5-9
Sales revenuesSales $ 480,000Less: Sales returns and allowance $12,000
Sales discounts 8,000 20,000Net sales 460,000Cost of goods sold 316,000Gross profit $ 144,000Operating expenses Selling expenses: $76,000 Administrative expenses 38,000
Total operating expenses 114,000 Income from operations $ 30,000
Net Income $21,500
PW AUDIO SUPPLY, INC.Multi-step Income Statement For the Year Ended
December 31, 2001
Illustration 5-9
Etc.
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Companies that use periodic inventory take a physical count to...
determine ending inventorycompute cost of goods sold
Companies that use perpetual inventory must take a physical inventory to check accuracy of “book inventory” to actual inventory.
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Taking a Physical InventoryDetermining inventory quantities by
counting, weighting or measuring each type of inventory.
Determining ownership of goods, including goods in transit,consigned goods.
Quantity of each kind of inventory is listed on inventory summary sheets where unit costs are applied.
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Questions Concerning Ownership
Do all the goods included in the count belong to the company?
Does the company own any goods not included in the count?
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Goods in Transit
These are goods on board a truck, train, ship, or plane at the end of the period.
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Goods in Transit
Who includes these in inventory?Buyer?Seller?
The Company
with Legal Title
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Shipping Terms
FOB (free on board) shipping point- ownership of goods passes to buyer when public carrier accepts the goods
FOB (free on board) destination- ownership of goods remains with the seller until the goods reach the buyer
Ownership passes to
owner here
Ownership passes to
buyer here
PublicCarrierCo
PublicCarrierCo
Seller
Seller
Buyer
Buyer
FOB Shipping Point
FOB Destination Point
Illustration 6-4
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Consigned Goods
Goods in your store that you don’t pay for until they sell…
the company does not take ownership.
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Gross Profit Rate=
Gross ProfitNet Sales
Company’s gross profit expressed as a percentage
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Operating Expenses To Sales Ratio=
Operating ExpensesNet Sales
Many companies have improved the efficiency of their operations, thus reducing the ratio of operating expenses to sales.
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