merchandising businesses
TRANSCRIPT
Chapter 5Merchandising Businesses
Sale
Merchandising businesses
generate revenue by selling goods.
The goods purchased for
resale are called merchandise
inventory.
Product Costs Versus Selling and Administrative Costs
Product Costs
Costs that are included in inventory.
Selling & Admin. Costs
Costs that are not included in
inventory. They are
sometimes called period
costs.
Allocation of Inventory Cost Between Asset and Expense Accounts
Beginning Inventory Balance
+
Inventory Purchased During the
Period
=
Cost of Goods
Available for Sale
Cost of Goods Available for Sale
Merchandise Inventory
(Balance Sheet)
Cost of Goods Sold (Income Statement)
Gross Margin (or Gross Profit)
Sales Revenue- Cost of Goods Sold
Gross Margin
Perpetual Inventory System
Perpetual Inventory System
Inventory account is adjusted perpetually (continually)
throughout the accounting
period.
Perpetual Inventory System
Let’s see how a perpetual
inventory system works by looking at transactions for June’s Plant Shop (JPS) from
chapter.
Event 2: JPS purchased merchandise inventory for $14,000 cash.
1. Decrease assets (cash).
2. Increase assets (merchandise inventory).
Asset Exchange
Transaction
Cash + Inventory = Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
(14,000) + 14,000 = n/a + n/a n/a - n/a = n/a (14,000) OA Cash Flow
Account Title Debit CreditInventory 14,000 Cash 14,000
In general journal form, the entry is as follows:
Event 3a: JPS recognized sales revenue from selling inventory for $12,000. Sales of inventory requires two entries, one for revenue and one for cost.
1. Increase assets (cash).
2. Increase equity (sales revenue).
Asset Source
Transaction
Cash + Inventory = Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
12,000 + n/a = n/a + 12,000 12,000 - n/a = 12,000 12,000 OA Cash Flow
Account Title Debit CreditCash 12,000 Sales 12,000
In general journal form, the entry is as follows:
Event 3b: JPS recognized $8,000 of cost of goods sold.
1. Decrease assets (merchandise inventory).
2. Decrease equity (cost of goods sold).
Asset Use Transaction
Cash + Inventory = Common
Stock + Retained Earnings Revenue - Expenses =
Net Income
n/a + (8,000) = n/a + (8,000) n/a - 8,000 = (8,000) n/a Cash Flow
Account Title Debit CreditCost of Goods Sold 8,000 Inventory 8,000
In general journal form, the entry is as follows:
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
Cash Discounts for Purchases
2/10, n/30Percentage of Discount
# of Days Discount Is Available
Otherwise, the Full
Amount Is Due
# of Days when Full Amount Is
Due
Cash Discounts
Transportation Terms
FOB shipping point(buyer pays)
FOB destination(seller pays)
Merchandise
Seller Buyer
Buyer Seller
Freight Terms FOB Shipping Point FOB DestinationCost Title Transportation-in Transportation-out
Responsible Party
FOB = Free on Board
Event 6 pg 248: The shipping terms for the inventory purchased were FOB shipping point. JPS paid the freight company $300 cash for delivering the merchandise. (A buying expense)
1. Decrease assets (cash).
2. Increase assets (merchandise inventory).
Asset Exchange
Transaction
Cash + Accts. Rec. + Inventory =
Accts. Pay. +
Common Stock +
Retained Earnings Revenue - Expenses =
Net Income
(300) + n/a + 300 = n/a + n/a + n/a n/a - n/a = n/a (300) OA Cash Flow
In general journal form, the entry is as follows:
Account Title Debit CreditInventory 300 Cash 300
Event 8: JPS incurred $450 of freight costs on inventory delivered to customers. (A selling expense)
1. Decrease assets (cash).
2. Decrease equity (transportation-out).
Asset Use Transaction
Buyer Seller
Freight Terms FOB Shipping Point FOB DestinationCost Title Transportation-in Transportation-out
Responsible Party
Cash + Accts. Rec. + Inventory =
Accts. Pay. +
Common Stock +
Retained Earnings Revenue - Expenses =
Net Income
(450) + n/a + n/a = n/a + n/a + (450) n/a - 450 = (450) (450) OA Cash Flow
Account Title Debit CreditFreight out expense 450 Cash 450
Lost, Damaged, or Stolen Inventory
Most merchandise companies
experience some level of inventory shrinkage, a term
that reflects decreases in inventory for
reasons other than sales to
customers.
Lost, Damaged, or Stolen Inventory
Assets = Liab. + Equity Revenue - Expenses = Net
Income (500) = n/a + (500) n/a - 500 = (500) n/a
Cash Flow
Assume a company determined that $500 of inventory was lost through shrinkage.
Here is how it would effect the statements:
Account Title Debit CreditInventory Loss (or Cost of Goods Sold) 500 Inventory 500
In general journal form, the entry is as follows: