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McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005 4-1 Chapter 4 Reporting and Analyzing Merchandising Operations

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Page 1: Reporting And Analyzing

McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2005

4-1

Chapter 4Chapter 4

Reporting and Analyzing Merchandising Operations

Page 2: Reporting And Analyzing

© The McGraw-Hill Companies, Inc., 2005McGraw-Hill/Irwin

4-2

Merchandising ActivitiesMerchandising Activities

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

Service organizations Service organizations sell timesell time to earn revenue. to earn revenue.

Examples: accounting firms, law firms, and Examples: accounting firms, law firms, and plumbing servicesplumbing services

RevenuesRevenues ExpensesExpensesMinus Net

incomeNet

incomeEquals

Page 3: Reporting And Analyzing

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Manufacturer Wholesaler Retailer Customer

Merchandising CompaniesMerchandising Companies

Merchandising ActivitiesMerchandising Activities

Page 4: Reporting And Analyzing

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4-4

Reporting Income of a MerchandiserReporting Income of a Merchandiser

Merchandising companies sell productsproducts to earn revenue.Examples: sporting goods, clothing, and auto parts

stores

Cost ofGoods Sold

GrossProfit

ExpensesNet

IncomeNet

SalesMinus Equals Minus Equals

Page 5: Reporting And Analyzing

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Operating Cycle for a MerchandiserOperating Cycle for a Merchandiser

Begins with the purchase of merchandise and ends with the collection of cash from the sale of

merchandise.

Purchases

Merchandiseinventory

Credit sales

Accountreceivable

CashcollectionPurchases

Merchandiseinventory

Cashsales

Cash SaleCash SaleCash SaleCash Sale Credit SaleCredit SaleCredit SaleCredit Sale

Page 6: Reporting And Analyzing

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4-6

Inventory SystemsInventory Systems

+

+

BeginninginventoryBeginninginventory

Net cost ofpurchasesNet cost ofpurchases

Merchandiseavailable for sale Merchandiseavailable for sale

Ending inventoryEnding inventoryCost of goods

soldCost of goods

sold

==

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4-7

Merchandise PurchasesMerchandise Purchases

On June 20, Jason, Inc. purchased $14,000 of Merchandise inventory paying cash.

On June 20, Jason, Inc. purchased $14,000 of Merchandise inventory paying cash.

Jun. 20 Merchandise Inventory 14,000 Cash 14,000

Purchase merchandise for cash

Page 8: Reporting And Analyzing

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4-8

Main Source, Inc. Invoice614 Tech Avenue Date NumberNashville, TN 37651 5/4/05 358-BI

Sold To

Name: Barbee, Inc. Attn: Tom Bell Address: One Willow Plaza Cookeville, Tennessee 38501

P.O. 167 Sales: 25 Terms 2/10,n/30 Ship: FedEx PrepaidItem Description Quanity Price AmountAC417 250 Backup System 500 54.00$ 27,000$

Sub Total 27,000 We appreciate your business! Ship Chg. -

Tax - Total 27,000$

Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount

Seller Invoice date Purchaser Order numberCredit terms Freight termsGoods Invoice amount

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4-9

Trade DiscountsTrade Discounts

Used by manufacturers and wholesalers to offer Used by manufacturers and wholesalers to offer better prices for greater quantities purchased.better prices for greater quantities purchased.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.

ExampleExampleMatrix, Inc. offers a 30% tradeMatrix, Inc. offers a 30% tradediscount on orders of 1,000discount on orders of 1,000

units or more of their popularunits or more of their popularproduct Racer. Each product Racer. Each

Racer has a list price of $5.25.Racer has a list price of $5.25.

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4-10

Purchase DiscountsPurchase Discounts

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

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2/10,n/302/10,n/30

Purchase DiscountsPurchase Discounts

Discount Percent

Discount Percent

Number of Days

Discount Is Available

Number of Days

Discount Is Available

Otherwise, Net (or All)

Is Due

Otherwise, Net (or All)

Is Due CreditPeriod

CreditPeriod

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Purchase DiscountsPurchase Discounts

On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit

terms are 2/10, n/30.

On May 7, Jason, Inc. purchased $27,000 of merchandise inventory on account, credit

terms are 2/10, n/30.

May 7 Merchandise Inventory 27,000 Accounts Payable 27,000

Purchase merchandise on account

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Purchase DiscountsPurchase Discounts

On May 15, Jason, Inc. paid the amount due on the purchase of May 7.

On May 15, Jason, Inc. paid the amount due on the purchase of May 7.

$27,000 × 2% = $540 discount

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Purchase DiscountsPurchase Discounts

After we post these entries, the accounts involved look like this:

After we post these entries, the accounts involved look like this:

Merchandise Inventory Accounts Payable 5/7 27,000 5/7 27,0005/15 540 5/15 27,000

Bal. 26,460 Bal. 0

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Not Paid Within the Discount PeriodNot Paid Within the Discount Period

If we fail to take a 2/10, n/30 discount, is it really expensive?If we fail to take a 2/10, n/30 discount, is it really expensive?

365 days ÷ 20 days × 2% = 36.5% annual rate 365 days ÷ 20 days × 2% = 36.5% annual rate

Daysin ayear

Daysin ayear

Numberof additionaldays before

payment

Numberof additionaldays before

payment

Percentpaid to keep

money

Percentpaid to keep

money

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Purchase Returns and AllowancesPurchase Returns and Allowances

Purchase Return . . .

Merchandise returned by the purchaser to the supplier.

Purchase Allowance . . .

A reduction in the cost of defective merchandise received by a purchaser from a supplier.

Purchase Return . . .

Merchandise returned by the purchaser to the supplier.

Purchase Allowance . . .

A reduction in the cost of defective merchandise received by a purchaser from a supplier.

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Purchase Returns and AllowancesPurchase Returns and Allowances

On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit

terms are 2/10, n/30.

On May 9, Matrix, Inc. purchased $20,000 of merchandise inventory on account, credit

terms are 2/10, n/30.

May 9 Merchandise Inventory 20,000 Accounts Payable 20,000

Purchased merchandise on account

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Purchase Returns and AllowancesPurchase Returns and Allowances

On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.

On May 10, Matrix, Inc. returned $500 of defective merchandise to the supplier.

May 10 Accounts Payable 500 Merchandise Inventory 500

Returned defective merchandise

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Purchase Returns and AllowancesPurchase Returns and Allowances

On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.

On May 18, Matrix, Inc. paid the amount owed for the purchase of May 9.

May 18 Accounts Payable 19,500 Cash 19,110 Merchandise Inventory 390

Paid account in full

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Transportation CostsTransportation Costs

FOB shipping point(buyer pays)

FOB destination(seller pays)

Merchandise

Seller Buyer

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Transportation CostsTransportation Costs

On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid

$100 transportation costs.

On May 12, Jason, Inc. purchased $8,000 of merchandise inventory for cash and also paid

$100 transportation costs.

May 12 Merchandise Inventory 8,100 Cash 8,100

Paid for merchandise and transportation

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Quick Check Quick Check

On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The

shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will

be part of Buyer’s July 6 journal entry?

a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450

On July 6, 2005 Seller Co. sold $7,500 of merchandise to Buyer, Co.; terms of 2/10,n/30. The

shipping terms were FOB shipping point. The shipping cost was $100. Which of the following will

be part of Buyer’s July 6 journal entry?

a. Credit Sales $7,500b. Credit Purchase Discounts $150c. Debit Merchandise Inventory $100d. Debit Accounts Payable $7,450

FOB shipping point indicates the buyer ultimately pays the freight. This is recorded with

a debit to Merchandise Inventory.

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Cost of Merchandise PurchasedCost of Merchandise Purchased

Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (10,388) Purchase returns and allowances (4,275) Add: Cost of transportation-in 4,895 Total cost of merchandise purchases 682,732$

Matrix, Inc.Total Cost of Merchandise Purchases

For Year Ended May 31, 2005Invoice cost of merchandise purchases 692,500$ Less: Purchase discounts (10,388) Purchase returns and allowances (4,275) Add: Cost of transportation-in 4,895 Total cost of merchandise purchases 682,732$

Matrix, Inc.Total Cost of Merchandise Purchases

For Year Ended May 31, 2005

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Accounting for Merchandise SalesAccounting for Merchandise Sales

Sales discounts and returns and allowances are Contra Revenue accounts.Sales discounts and returns and allowances are Contra Revenue accounts.

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Sales of MerchandiseSales of Merchandise

On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was

carried in inventory at a cost of $18,000.

On March 18, Diamond Store sold $25,000 of merchandise on account. The merchandise was

carried in inventory at a cost of $18,000.

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Sales DiscountsSales Discounts

On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.

Let’s prepare the journal entries.Let’s prepare the journal entries.

On June 8, Barton Co. sold merchandise costing $3,500 On June 8, Barton Co. sold merchandise costing $3,500 for $6,000 on account. Credit terms were 2/10, n/30. for $6,000 on account. Credit terms were 2/10, n/30.

Let’s prepare the journal entries.Let’s prepare the journal entries.

Jun. 8 Accounts Receivable 6,000 Sales 6,000

Sales of merchandise on credit

Cost of Goods Sold 3,500 Merchandise Inventory 3,500

To record cost of sales

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Sales DiscountsSales Discounts

On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.

On June 17, Barton Co. received a check for $5,880 in full payment of the June 8 sale.

Jun. 17 Cash 5,880 Sales Discount 120

Accounts Receivable 6,000 Received payment less discount

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Sales Returns and AllowancesSales Returns and Allowances

On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The

credit terms were 2/10, n/30.

On June 12, Barton Co. sold merchandise costing $4,000 for $7,500 on account The

credit terms were 2/10, n/30.

Jun. 12 Accounts Receivable 7,500 Sales 7,500

Sales of merchandise on credit

Cost of Goods Sold 4,000 Merchandise Inventory 4,000

To record cost of sales

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Sales Returns and AllowancesSales Returns and Allowances

On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is

related to the June 12 sale.

On June 14, merchandise with a sales price of $800 and a cost of $470 was returned to Barton. The return is

related to the June 12 sale.

Jun. 14 Sales Returns and Allowances 800 Accounts Receivable 800

Customer returned merchandise

Merchandise Inventory 470 Cost of Goods Sold 470

Returned goods placed in inventory

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Sales Returns and AllowancesSales Returns and Allowances

On June 20, Barton received the amount owed to it from the sale of June 12.

On June 20, Barton received the amount owed to it from the sale of June 12.

Jun. 20 Cash 6,566 Sales Discount 134

Accounts Receivable 6,700 Received payment less discount

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Let’s complete the accounting cycle by preparing theclosing entriesclosing entries for

Barton.

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Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

Step 1:Step 1: Close Credit Balances in Temporary Accounts to Income Summary.

Dec. 31 Sales 323,800 Income summary 323,800

To close credit balances in temporary accounts

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Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

Step 2:Step 2: Close Debit Balances in Temporary Accounts to Income Summary.

Dec. 31 Income Summary 310,900 Sales Discounts 4,300 Sales Returns 2,000 Cost of Goods Sold 233,200 Adm. Salaries Expense 18,200 Sales Salaries Expense 29,600 Insurance Expense 1,200 Rent Expense 8,100 Supplies Expense 1,000 Advertising Expense 13,300

To close debit balances in temporary accounts

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Step 3:Step 3: Close Income Summary to Retained Earnings

Step 3:Step 3: Close Income Summary to Retained Earnings

Dec. 31 Income Summary 12,900 Retained Earnings 12,900

To close Income Summary account

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Step 4:Step 4: Close Dividends to Retained Earnings.Step 4:Step 4: Close Dividends to Retained Earnings.

Dec. 31 Retained Earnings 4,000 Dividends 4,000

To close the withdrawals account

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Income Statement FormatsIncome Statement Formats

Multiple-StepMultiple-Step

Single-StepSingle-Step

Multiple-StepMultiple-Step

Single-StepSingle-Step

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Multiple-Step Income StatementMultiple-Step Income Statement

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Single-Step Income StatementSingle-Step Income Statement

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Classified Balance SheetClassified Balance Sheet

Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200

Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$

Assets Liabilities

Merchandising CompanyBalance Sheet

December 31, 2005

Cash 10,200$ Accounts payable 1,200$ Merchandise Inventory 1,200 Notes payable 4,000 Equipment 16,000 Total liabilities 5,200

Equity 22,200 Total assets 27,400$ Total liabilities and equity 27,400$

Assets Liabilities

Merchandising CompanyBalance Sheet

December 31, 2005

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Acid-Test RatioAcid-Test Ratio

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to

face liquidity problems in the near future.

= Quick AssetsQuick Assets Current LiabilitiesCurrent Liabilities

Acid-TestAcid-TestRatioRatio

Acid-TestAcid-TestRatioRatio ==

Cash + S-T Investments + Receivables Cash + S-T Investments + Receivables Current LiabilitiesCurrent Liabilities

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Gross Margin RatioGross Margin Ratio

Percentage of dollar sales

available to cover expenses and

provide a profit.

GrossMarginRatio

Net Sales - Cost of Goods Sold

Net Sales

=

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End of Chapter 4End of Chapter 4