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Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University

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Accounting for Merchandising Businesses

Chapter 5 Student Version These slides should be viewed

using the presentation mode (left

click your mouse on the icon).



Learning Objective 1

Distinguish between the

activities and financial

statements of service and

merchandise businesses.



LO 1

Nature of Merchandising Businesses

Most services businesses, such as plumbing

repair and accounting services, have no

merchandise.

Merchandising businesses, such as a

department store or sandwich shop,

generate revenue by selling a product.

Merchandise on hand (not sold) at the end

of an accounting period is called

merchandise inventory.




Describe and illustrate

the financial

statements of a

merchandising

business.



LO 2

Multiple-Step Income Statement

The multiple-step income statement

contains several sections, subsections, and

subtotals.

Below is the revenue section for

NetSolutions.



LO 2

Revenue from Sales

Sales is the total amount charged

customers for merchandise sold, including

cash sales and sales on account.

Sales returns and allowances are granted

by the seller to customers for damaged or

defective merchandise.



LO 2

Revenue from Sales

Sales discounts are granted by the seller to

customers for early payment of amounts

owed.

Net sales is determined by subtracting sales

returns and allowances and sales discounts

from sales.



LO 2

Cost of Merchandise Sold

The cost of merchandise sold is the cost of

the merchandise sold to customers.

Merchandise costs consist of all the costs of

acquiring the merchandise and readying it

for sale, such as purchase and freight costs.

A single figure for cost of merchandise sold

is shown on the multiple-step income

statement on the next slide.



LO 2


The buyer may return merchandise to the

seller (purchase return), or the buyer may

receive a reduction in the initial price at

which the merchandise was purchased

(purchase allowance).

You have seen that sellers may offer

customers sales discounts for early

payment of their bills. From the buyer’s

perspective, such discounts are referred to

as purchase discounts.



LO 2


If merchandise inventory at the end of the

period is determined by taking a physical

count of inventory on hand, a periodic

inventory system is being used.

Under the perpetual inventory system, the

amounts of inventory purchased, available

for sale, and sold are continuously

(perpetually) updated in the inventory

records.



LO 2

Gross Profit

Gross profit is computed by subtracting the

cost of merchandise sold from net sales.

Gross

Profit



LO 2

Selling expenses are incurred directly in the

selling of merchandise.

Multiple-Step Income Statement

Administrative expenses, sometimes called

general expenses, are incurred in the

administration or general operations of the

business.

Income from operations, sometimes called

operating income, is determined by

subtracting operating expenses from gross

profit.



LO 2

Other Income and Expense

Other income is revenue from sources other

than the primary operating activity of a

business.

Other expense is an expense that cannot

be traced directly to the normal operations

of the business.



LO 2

Single-Step Income Statement

An alternative form of income statement is

the single-step income statement. As shown

in the next slide, the income statement for

NetSolutions deducts the total of all

expenses in one step from the total of all

revenues.



Balance Sheet

The form of balance sheet with the assets

on the left-hand side and the liabilities and

stockholders’ equity on the right-hand side

is called the account form.

LO 2

When the balance sheet is presented in a

downward sequence in three sections, it

has been prepared using the report form.




Describe and illustrate the accounting

for merchandise transactions

including: sale of merchandise;

purchase of merchandise; freight;

sales taxes and trade discounts; dual

nature of merchandising transactions.



On January 3, NetSolutions sold $1,800 of

merchandise for cash.

Cash Sales

LO 3



Using the perpetual inventory system, the cost of

merchandise sold and the decrease in

merchandise inventory are also recorded. The

cost of merchandise sold on January 3 is $1,200.

LO 3

Cash Sales



Sales made to customers using credit cards are

recorded as cash sales. Assume that NetSolutions

paid credit card processing fees of $48 on January

31.

Cash Sales

LO 3



On January 12, NetSolutions sold merchandise

on account for $510.

Sales on Account

LO 3

The cost of merchandise sold was $280.



The terms for when payments for

merchandise are to be made are called

credit terms.

If payment is required on delivery, the

terms are cash or net cash. Otherwise, the

buyer is allowed an amount of time, known

as the credit period, in which to pay.

Sales Discounts

LO 3



On January 17, NetSolutions receives the amount

due within ten days, so the buyer deducted $30

($1,500 x 2%) from the invoice amount.

Receipts on Account

LO 3



Credit Memo

LO 3

A credit memorandum, often called a credit

memo, authorizes a credit to (decreases)

the buyer’s account receivable.



On January 13, issued Credit Memo No. 32 to Krier

Company for merchandise returned to NetSolutions.

Selling price, $225; cost to NetSolutions, $140.

Credit Memo

LO 3



Purchase Transactions

LO 3

On January 3, NetSolutions purchased merchandise

for cash (assume a perpetual inventory is used).



*


LO 3

On January 4, NetSolutions purchased

merchandise on account from Thomas Corporation.



Purchases Discounts

A buyer may receive a discount from the

seller (sales discount) for early payment of

the amount owed.

From the buyer’s perspective, such

discounts are called purchases discounts.

LO 3



Alpha Technologies issues an invoice for $3,000 to

NetSolutions dated March 12, with terms 2/10,

n/30. NetSolutions is trying to determine if it should

pay the invoice within the discount period.

LO 3


LO 3



LO 3

Alpha Technologies issued an invoice for $3,000 to

NetSolutions dated March 12, with terms 2/10,

n/30.

Based on the calculation in the previous slide,

NetSolutions pays the amount due, less the

discount, on March 22.




Assume that, instead of paying the invoice within

the discount period, NetSolutions pays the invoice

on April 11.

Discount Not Taken

LO 3



LO 3

Purchases Returns and Allowances

A purchases return involves actually

returning merchandise that is damaged or

does not meet the specifications of the

order.

From a buyer’s perspective, such returns

are called purchases returns and

allowances.



LO 3

Debit Memo

A debit memorandum, often called a debit

memo, informs the seller of the amount the

buyer proposes to debit to the account

payable due the seller.



LO 3

NetSolutions records the return of the

merchandise as follows:

Debit Memo

NetSolutions receives a delivery from Maxim

Systems and determines that $900 of the items

are not the merchandise ordered. Debit

memorandum #18 is issued to Maxim System.



On May 2, NetSolutions purchased $5,000 of

merchandise on account from Delta Data Link,

terms 2/10, n/30.

Merchandise Purchased

LO 3

On May 4 , NetSolutions returned $3,000 of the

merchandise purchased from Delta Data Link.



On May 12, NetSolutions paid for the purchase of

May 2 less the return and discount.

Invoice Paid

LO 3



Freight

If ownership of the merchandise passes to

the buyer when the seller delivers the

merchandise to the freight carrier, the terms

are said to be FOB (free on board) shipping

point.

LO 3

If ownership of the merchandise passes to

the buyer when the buyer receives the

merchandise, the terms are said to be FOB

(free on board) destination.



On June 10, NetSolutions buys merchandise from

Magna Data on account, $900, terms FOB

shipping point and pays the shipping cost of $50.

Two entries are required.

LO 3

Freight



On June 15, NetSolutions sells merchandise to

Kranz Company on account, $700, terms FOB

destination. The cost of the merchandise sold is

$480. Again, two entries are required.

Sale Plus Freight Cost

LO 3



On June 15, NetSolutions pays freight of $40 on

the sale of June 15.

Sale Plus Freight Cost

LO 3



On June 20, NetSolutions sells merchandise to

Planter Company on account, $800, terms FOB

shipping point. NetSolutions paid freight of $45,

which was added to the invoice. The cost of the

merchandise sold is $360. Three entries are

needed. These are shown on the next slide.

LO 3

Seller Prepays Freight



LO 3

Seller Prepays Freight



On August 12, merchandise is sold on account to

Lemon Company, $100 (plus a 6% sales tax).

Sales Taxes

LO 3

The seller pays to the taxing authority (state) the

total amount of the sales taxes collected.



Trade Discounts

When wholesalers offer special discounts to

certain classes of buyers who order large

quantities, these discounts are called trade

discounts.

LO 3



Each merchandising transaction affects a

buyer and a seller. In the following

illustrations, we show how the same

transactions would be recorded by both

the seller and the buyer.

Dual Nature of Merchandise Transactions

LO 3




LO 3

July 1. Scully Company sold merchandise on

account to Burton Co., $7,500, terms

FOB shipping point, n/45. The cost of the

merchandise sold was $4,500.



Scully Company (Seller)

Accounts Receivable—Burton Co. 7,500 Sales 7,500 Cost of Merchandise Sold 4,500 Merchandise Inventory 4,500

Burton Company (Buyer)

Merchandise Inventory 7,500 Accounts Payable—Scully Co. 7,500


LO 3



July 2. Burton Company paid

transportation charges of $150 on

the July 1 purchase from Scully

Company.

LO 3




No entry.


Merchandise Inventory 150 Cash 150

LO 3





July 5. Scully Company sold merchandise on

account to Burton Co., $5,000, terms

FOB destination, n/30. The cost of the

merchandise sold was $3,500.

LO 3




Accounts Receivable—Burton Co. 5,000 Sales 5,000 Cost of Merchandise Sold 3,500 Merchandise Inventory 3,500



Merchandise Inventory. 5,000 Accounts Payable—Scully Co. 5,000

LO 3




July 7. Scully Company paid transportation

costs of $250 for delivery of

merchandise sold to Burton Company

on July 5.

LO 3





Delivery Expense 250 Cash 250


No entry.

LO 3




July 13. Scully Company issued Burton

Company a credit memorandum for

merchandise returned, $1,000. The

cost of the merchandise returned was

$700.

LO 3





Sales Returns and Allowances 1,000 Accounts Receivable—Burton Co. 1,000 Merchandise Inventory 700 Cost of Merchandise Sold 700


Accounts Payable—Scully Co. 1,000 Merchandise Inventory 1,000

LO 3




July 15. Scully Company received payment

from Burton Company for purchase

of July 5.

LO 3





Cash 4,000 Accounts Receivable—Burton Co. 4,000


Accounts Payable—Scully Co. 4,000 Cash 4,000

LO 3




July 18. Scully Company sold merchandise

on account to Burton Company,

$12,000, terms FOB shipping point,

2/10, n/eom. Scully prepaid

transportation costs of $500, which

were added to the invoice. The cost

of the merchandise sold was $7,200.

LO 3





Accounts Receivable—Burton Co. 12,000 Sales 12,000 Accounts Receivable—Burton Co. 500 Cash 500

Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200


Merchandise Inventory 12,500 Accounts Payable—Scully Co. 12,500

LO 3




July 28. Scully Company received payment

from Burton Company for purchase

of July 18, less discount (2% ×

$12,000).

LO 3





Cash 12,260 Sales Discounts 240 Accounts Receivable—Burton Co. 12,500


Accounts Payable—Scully Co. 12,500 Merchandise Inventory 240 Cash 12,260

LO 3





Describe the adjusting and

closing process for a

merchandising business.



LO 4

Adjusting Entry for Inventory Shrinkage

Merchandising businesses may experience

some loss of inventory due to shoplifting,

employee theft, or errors in recording or

counting inventory.

If the balance of the Merchandise Inventory

account is larger than the total amount of

the merchandise count, the difference is

often called inventory shrinkage or

inventory shortage.



Debit each temporary account with a credit

balance, such as Sales, for its balance and credit

Income Summary.

LO 4

Step 1: Closing Entries



Credit each temporary account with a debit

balance, such as an expense, for its balance and

debit Income Summary.

Step 2: Closing Entries

LO 4



3. Debit Income Summary for the amount of its

balance (net income) and credit Retained

Earnings.

LO 4

Steps 3 and 4: Closing Entries

4. Debit Retained Earnings for the balance of the

Dividends account and credit the Dividends

account.




Describe and illustrate the

use of the ratio of net sales

to assets in evaluating a

company’s operating

performance.



Ratio of Net Sales to Assets

The ratio of net sales to assets measures

how effectively a business is using its assets

to generate sales.

Ratio of Net

Sales to

Assets

Net Sales

Average Total Assets =

LO 5



LO 5

Ratio of Net Sales to Assets

The ratio of net sales to assets for each year

are as follows:

Prepared by: C. Douglas Cloud

Professor Emeritus of Accounting

Pepperdine University



Accounting for Merchandising Businesses

The End

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