nobles fin5 ppt_05

Chapter 5Merchandising

Operations

© 2016 Pearson Education, Inc.

Learning Objectives

1. Describe merchandising operations and the two types of merchandise inventory systems

2. Account for the purchase of merchandise inventory using a perpetual inventory system

3. Account for the sale of merchandise inventory using a perpetual inventory system

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Learning Objectives

4. Adjust and close the accounts of a merchandising business

5. Prepare a merchandiser’s financial statements

6. Use the gross profit percentage to evaluate business performance

7. Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5A)

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Learning Objective 1

Describe merchandising operations and the two types of merchandise inventory systems

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What Are Merchandising Operations?

• A merchandiser is a business that sells merchandise, or goods, to customers. – The merchandise that this type of business

sells is called merchandise inventory.

• A wholesaler buys goods from a manufacturer and sells them to retailers.

• A retailer buys merchandise from manufacturers or a wholesaler and then sells the goods to consumers.

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The Operating Cycle of a Merchandising Business

• The operating cycle begins when the company purchases inventory from a vendor.

• The company then sells the inventory to customers.

• The company collects cash from customers.

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• The income statement of a merchandiser reports: • Sales Revenue rather than Service Revenue• The cost of merchandise sold to customers,

called Cost of Goods Sold (COGS)• Gross profit, which is net Sales Revenue minus

Cost of Goods Sold• Operating expenses, which re expenses other

than Cost of Goods Sold

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Merchandise Inventory Systems: Perpetual and Periodic Inventory Systems

• Businesses need to determine the value on merchandise inventory on hand and the value sold.

• The two inventory accounting systems:• A periodic inventory system requires a physical

count of inventory to determine inventory on hand.

• A perpetual inventory system offers continuous computerized record of merchandise inventory.

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Account for the purchase of merchandise inventory using a perpetual inventory system

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Purchase of Merchandise Inventory

Assume that Smart Touch Learning receives the goods on June 3 and makes a payment on that date.

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Purchase of Merchandise Inventory

Now assume that on June 3, instead of paying cash, Smart Touch Learning receives the merchandise inventory on account.

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Purchase Discounts

If Smart Touch Learning pays on June 15, which is within the discount period, the cash payment entry would be:

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Purchase Returns and Allowances

• Sellers allow purchasers to return merchandise that is defective, damaged, or unsuitable.

• Purchase returns exist when sellers allow purchasers to return merchandise.

• Purchase allowances are granted to purchasers as an incentive to keep goods that are not as ordered.

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Purchase Returns and Allowances

Assume Smart Touch Learning returns $7,000 of the June 3 purchase on June 4.

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Transportation Costs

While goods are in transit, rules are necessary to determine who bears the risk of loss.

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Freight In

With FOB shipping point, the freight cost is paid by the buyer and is part of the inventory cost. Assume Smart Touch Learning pays a $60 freight charge on the June 3 purchase.

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Freight In Within Discount Period

If Smart Touch Learning pays within the 15-day period, it gets a 3% discount.

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Cost of Inventory Purchased

• Knowing the net cost of inventory allows a business to determine the actual cost of the merchandise purchased.

• Net cost of inventory is calculated as follows:

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Account for the sale of merchandise inventory using a perpetual inventory system

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How Are Sales of Merchandise Inventory Recorded in a Perpetual Inventory System?

• The amount a business earns from selling merchandise inventory is called Sales Revenue.

• Two entries are required to record sale transactions:– The first entry records Sales Revenue and Cash

or Accounts Receivable.– The second entry records Cost of Goods Sold

and Merchandise Inventory.

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© 2016 Pearson Education, Inc. 5-25

Sale of Merchandise Inventory



Smart Touch Learning sold 2 tablets for $1,000 cash. The cost of those tablets was $700.

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Smart Touch Learning sold 10 tablets for $500 each on account with terms of 2/10, n/30 on June 21. The goods cost $3,500.

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Sales Discounts

A sales discount reduces the amount of cash received from a customer for early payment. Sales Discounts is a contra account to Sales Revenue. Assume the customer that purchased the tablets on June 21 made payment on June 30, within the discount period.

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Sales Returns and Allowances

• The return of goods by a customer or the granting of an allowance is called sales returns and allowances.

• Sales Returns and Allowances is a contra account to Sales Revenue and has a normal debit balance.

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Sales Return

On June 25, a customer returns 3 tablets that were sold for $1,500, with a cost of goods sold of $1,050.

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Sales Allowance

On June 28, Smart Touch Learning grants a $100 sales allowance for goods damaged in transit.

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Sales Returns and Allowances Within Discount Period

The discount is calculated net of the allowances and returns. On June 30, Smart Touch Learning receives payment on the receivable.

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Transportation Costs—Freight Out

Smart Touch Learning paid $30 to ship goods to a customer on June 21.

Remember: Freight out is a selling expense.

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Net Sales Revenue and Gross Profit

• Net Sales Revenue is the amount a company has earned on sales of merchandise after returns, allowances, and discounts have been taken out.

• Net Sales Revenue is determined using the following formula:

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For the year, Smart Touch Learning sells $297,500 of merchandise inventory, receives $11,200 of sales returns and allowances, and accepts $5,600 of early payment discounts.

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Gross profit is a measure of a business’s success.

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It indicates the amount available to cover operating expenses.



Adjust and close the accounts of a merchandising business

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What Are the Adjusting and Closing Entries for a Merchandiser

• Actual inventory on hand may differ from what the books show.– Inventory shrinkage is loss of inventory

occurring from theft, damage, and errors.

• An adjustment is made to Merchandise Inventory based on the physical count of goods on hand.

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Closing the Accounts of a Merchandiser

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Closing the Accounts of a Merchandiser

1. Close revenues via the Income Summary.

2. Close expenses and contra revenues via the Income Summary.

3. Close Income Summary via Retained Earnings.

4. Close Dividends via Retained Earnings.

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Prepare a merchandiser’s financial statements

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How Are a Merchandiser’s Financial Statements Prepared?

• The formats for income statements are:– The single-step income statement presents

revenues and expenses with no subtotals.– The multi-step income statement presents

revenues and expenses with subtotals to highlight significant relationships.

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Single-Step Income Statement

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Multi-Step Income Statement

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• Operating expenses are reported in two categories:– Selling expenses are related to marketing and

selling the company’s goods and services.– Administrative expenses include expenses not

related to marketing the company’s goods and services.

• Gross profit minus operating expenses equals operating income.

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• After determining operating income, the next section of the income statement reports other revenues and expenses.

• The last section of the income statement reports income tax expense.

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Statement of Retained Earnings and the Balance Sheet

• The statements of retained earnings for merchandisers and service businesses are similar.

• The balance sheet for a merchandiser reports Merchandise Inventory.

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Use the gross profit percentage to evaluate business performance

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How Do We Use the Gross Profit Percentage to Evaluate Business Performance?

• The gross profit percentage measures the profitability of each sales dollar above the cost of goods sold.

• A high gross profit percentage is desired.

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Account for the purchase and sale of merchandise inventory using a periodic inventory system (Appendix 5A)

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How Are Merchandise Inventory Transactions Recorded in a Periodic Inventory System?

• Perpetual inventory systems are too expensive for smaller businesses.

• Periodic inventory systems require physical counts of inventory to determine quantities on hand.– Merchandise Inventory is updated at the end of

the period, during the closing process.

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Purchases of Merchandise Inventory

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The entry to record the receipt of goods on account on June 3 and payment on June 15 using the periodic inventory system is as follows:


Recording Purchase Returns and Allowances

Prior to payment, on June 4, Smart Touch Learning returned 20 tablets, costing $7,000, to the vendor.

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Recording Purchase Returns and Allowances

• A business records the cost of all inventory bought in the Purchases account.

• Net Purchases is the sum of Purchases less Purchase Returns and Allowances and Purchase Discounts.

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Recording Transportation Costs

On June 3, Smart Touch Learning paid a freight charge.

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• No running record of merchandise inventory is maintained.

• There is no need to record an entry to Merchandise Inventory and Cost of Goods Sold.

• Accounting for sales discount and sales return and allowances is the same as under the perpetual inventory system.

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Adjusting and Closing Entries

• No adjustment is required for inventory shrinkage.

• Temporary accounts are closed via the Income Summary:– Purchase Returns and Allowances– Purchase Discounts– Purchases– Freight In

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Adjusting and Closing Entries


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Preparing Financial

Statements


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Preparing Financial

Statements


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Preparing Financial

Statements



Preparing Financial Statements

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