financial accounting

Allama Iqbal Open University 1

1Allama Iqbal Open University

Accounting for Merchandizing

BusinessPresented ByM.Adeel (0323-4481864)

Course : Financial Accounting

2

Presented to


Contents

Merchandising Activities:• Operating Cycle of Merchandising Companies• Income statement of Merchandising Companies• Perpetual and Periodic Inventory Systems

Case Study• Introduction• Vision and Mission Statement• Practical and theoretical review• SWOT Analysis• Conclusion & Recommendation• References


Difference Between Merchandising and Service

Business Revenue activities of a merchandising business involve the buying and selling of merchandise

Comparison to service business

Service Business Merchandising Business

Fees earned Sales

Less Operating expenses

Less Cost of merchandise sold

=Net income =Gross Profit

Less Operating expenses

=Net Income


Merchandising Activities What is Inventory? “Goods that are purchased for the purpose to resale

to customers ” Operating cycle of a Merchandising Company: “The series of transactions through which a

business generate its revenue and its cash receipts from consumer.” What is Cost of Goods Sold? “It is the cost which a company pays for making a product or for inventory purchased” What is Goods Available for sale? “ It is the total goods which you could have sold in your interim period of company”


Types of Merchandise Company

Whole Seller & Retailer:

Wholesaler buy large quantity of merchandise from several different manufactures and then resell this merchandise to many different retailers.

A retailer is a business that sells merchandise directly to the public.

Manufacturer Wholesaler Retailer Customer

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Measuring Net Income

Net Income (Loss)

Less

LessEqual

Equal

SalesRevenue

Cost of Goods Sold

Gross Profit

Operating Expenses

Sales Revenue – income earned in selling merchandise

Cost of Goods Sold – cost of merchandise sold during the period Operating Expenses – expenses

incurred in running the business


Income Statement contd..Sales - Cost of goods sold = Gross profitGross Profit - Other Expenses = Net Income

ExampleSales $15,000Less : Cost of goods sold (3500)Gross profit $11,500Operating Expenses:Wages Exp 620Adv Exp 150Depreciation Exp 430 (1200)Net Income $10,300


Operating Cycle for a Merchandiser

Purchases

Merchandiseinventory

Credit sales

Accountreceivable

Cashcollection

Purchases

Merchandiseinventory

Cashsales

Cash Sale Credit Sale


Approaches used in Accounting for Inventories

Perpetual System: All Transaction including Costs of merchandise are recorded immediately as they occur. Record is up-to- date all the time. Periodic System: No effort is made to keep records up-to-date neither inventory nor Cost of goods sold and are only updated at the end of interim period.


Perpetual inventory systemThe following example contains several journal entries used to

account for transactions in a perpetual inventory system:

Purchase of Merchandise:Purchase of inventory is recorded at cost.To record a purchase of $5,000 of 5 items that are stored in

inventory each item has cost $1,000.

Account Title Debit Credit

Inventory $5000 Cash $5000


Perpetual inventory systemSales of Merchandise:Sold 3 items $1200 each, for $3,600. for which the cost is 3,000.

Debit CreditCash $3600

Revenue $3600Cost of Goods Sold

$3000

Inventory $3000 Gross Profit: 3600 – 3000 = $600

Let Expenses are $200. Then,Net Income = 600 – 200 = $400


If inventory is purchased and sold on account, Then entries will be:

Debit CreditA/C Receivables $3600

Sale $3600

Account Title Debit CreditInventory $5000 A/C Payable $5000

Selling of Inventory: (On Account)

Debit Credit

Cost of Goods Sold $3000

Inventory $3000

Inventory Record

Purchase of Inventory: (On Account)


Payment of A/C Payables to Suppliers:

Collection of Accounts Receivable from Customers:

Debit CreditCash $3600 A/C Receivable

$3600

Debit CreditA/C Payables $5000 Cash $5000


Periodic Inventory System

Its an alternative to a perpetual inventory system

When merchandise is purchased, its cost is debited to an account entitled Purchases.


Example The inventory on hand at the end of

2011 cost $20000.

During 2012, purchases of merchandise for resale of customers totaled $100000

Inventory on hand at the end of 2012 cost $15000.


Cont…Recording Purchases of Merchandises:Suppose from total purchases of $100,000

the first purchase was of $10,000 so purchase entry will be:

Debit Credit

Purchases 10000

Cash 10000


Computing the cost of goods sold:

Inventory(beginning of the year 2012)………… $20000Add : Purchases……………………....................100000Cost of goods available for sale………………..$120000Less : Inventory (end of the year 2012)………….15000Cost of goods sold…………………………….$105000


Purchase discount is based on the invoice cost less returns and allowances, if any.

The Purchase Discount account is used to record the amount saved by paying promptly. It is a contra account having a normal credit balance.

Periodic Inventory System


Types of Discount

DISCOUNT

CASHDISCOUNT

TRADEDISCOUNT

PURCHASEDISCOUNT

SALEDISCOUNT


Trade discounts are given to reduce the list price to actual sales price which may be due to the volume of transactions.

A buyer and or the seller does not record the list prices and the trade discounts in its accounts. Instead, a buyer/seller records purchases or sales net of the trade discount (at invoice price).

Trade Discount


Cash discounts are normally given to encourage prompt payment.

For example2/10, n/30

Cash Discount


Transportation Costs The terms of a sale should indicate when the

ownership of the merchandise passes to the buyer.○ This point determines which party, the buyer or the seller must

pay the transportation costs.


Transportation CostsFOB – shipping point

○ The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the transportation company.

○ Buyer pays the transportation costsFOB – destination point

○ The ownership of the merchandise passes to the buyer when the seller delivers the merchandise to the buyer.

○ Seller pays the transportation costs


Transportation CostFREIGHT TERMS

FOB FOBShipping Point

DestinationOwnership (title)passes to buyerwhen merchandise Delivered to Receivedis freight carrier by buyer

Transportationcosts are paidby Buyer Seller

Risk of loss duringtransportationbelongs to Buyer Seller


CASE STUDY


Haleeb Foods Introduction Fast Growing food product in Pakistan Established in 1984 Commercial Production start in 1987 HFL installed Powder plant in 1992 Pakistan first food company get ISO-9002 in 1997 Annual turnover of Rs 9.2 Billion 3 Leading Brand including Haleeb, Candia and Tropico Thickest milk for best tea


Vision and Mission Statement

Vision Statement Mission Statement

Optimizing Resources and deliver sustainable growth

Productivity Affordability Highly Nutritional


Practical and Theoretical ReviewAccounting for merchandizing business and different aspects of

business volume can define in this process and report• Tough old days seem coming to end as HFL slowly recover from its losses• HFL lost many market share to multinational giants, many ups and downs faced which is a good case study for medium scale industries• Previous management took wrong decisions specially capitalization on the popularity of milk product• In 2008 Nestle give tough time to its product milk pack• In 2008 HFL took loan while its competitor Nestle and Engro were awash with fund• Haleeb market share decline from 52% to 10% where another product Tea Max is doing well in tea whitener category• Now they are offering eight different products and plan to introduce a few more this year which will help to regain lost momentum and pay off debts


SWOT ANALYSISStrengths

No. 1 Dairy Company Major share holder in food

industry of Pakistan Friendly Environment

Weaknesses

Depend on 3rd Party for supply of milk

Low Promotional Activity Low sales margin due to high

value added products

Opportunities Threats

HFL can go for joint venture with other company to attract market share

Expand its product range specially milk product

Uncertainty of economic condition

Price fluctuation due to rupee devaluation

Dependency on contractors for supply of milk


Recommendation

HFL should allocate a healthy budget for the advertising of its products. HR Department of HFL should introduce HRIS to increase the efficiency of the company. The co-operation among the different departments of HFL should also improve which increase the efficiency of the company. The activities like customer satisfaction day should be performed on regular basis so the company should know about the feedback of the customers regarding the products and image of the company. The shopkeeper complains that HFL don’t provide replacement to the expired products so they should provide proper replacements to the shopkeepers. HFL should improve its distribution system especially the retailers are not happy with distribution of Haleeb Milk.


Conclusion

As a whole HFL is a good organization to work Certain departments that need improvements It is surviving in the FMCG’s sector with some strengths and weaknesses. I am of the view that if the management of HFL wants to show the same results in the future that it should have to take some decisions before time, because in the 21st century only those organizations can survive who are utilizing all their resources efficiently and effectively.


References

www.haleebfood.com www.sikiwho.com www.about.com www.generalfoods.com www.worldfoodprogramme.edu Relevant text book of AIOU Personal observations

http://www.haleebfood.com/

http://www.sikiwho.com/

http://www.about.com/

http://www.generalfoods.com/

http://www.worldfoodprogramme.edu/

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