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8/12/2019 Chapter6 Merchandise Inventory
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MERCHANDISING
TRANSACTIONS
CHAPTER 6CHAPTER 6
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Service OrganizationsService Organizations vsvs..
Merchandising CompaniesMerchandising CompaniesService organizations sell timetime to earnrevenue
Examples include accounting firms, lawfirms, and plumbing services
These have been our emphasis up to now
Service Company
Income StatementFor the Year Ended December 31, 1999
Service revenues 150,000$
Expenses 137,500
Net income 12,500$
Not aplumber!
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Service OrganizationsService Organizations vsvs..
Merchandising CompaniesMerchandising CompaniesMerchandising companies sell productsproductsto earn revenue Examples include sporting goods, clothing,
and auto parts stores These will be our emphasis for the rest of
the semesterMerchandising Company
Income Statement
For the Year Ended December 31, 1999
Sales revenues 150,000$
Cost of goods sold 80,000
Gross margin 70,000
Expenses 46,500
Net income 23,500$
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Inventory
Products held for sale
Classified as asset Sales
Exchange of merchandise for an asset
Classified as revenue
Cost of Goods Sold (COGS)
Cost of inventory sold during the period
Classified as expense
Merchandising CompaniesMerchandising Companies
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ROLLROLL
EM !EM !
Video #1(Approx. 6 min.)
Video #2(Approx. 8 min.)
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Merchandising CompaniesMerchandising Companies
Manufacturer Wholesaler Retailer Final
Customer
Channel of DistributionChannel of Distribution
(5 points on next test)
210
Can manufacturer sell direct to final customer?(i.e., can green box be skipped?)
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Who cares?
Accounting TerminologyAccounting Terminology
Sales Invoice
vs.
Purchase InvoiceWhats the difference?
211
prepares?
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Recording and Reporting SalesRecording and Reporting Sales
Gross salesLess: Sales discountsLess: Sales returns and allowancesNet sales
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Recording Gross SalesRecording Gross Sales
On May 13, TCom sold $25,000 ofmerchandise for cash.
GENERAL JOURNAL Page 74
Date Description PR Debit Credit
May 13 Cash 25,000
Sales 25,000
To record the sale of
merchandise for cashIf the sale had been on account, we woulddebit Accounts Receivable instead of Cash.
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Two Types of DiscountsTwo Types of Discounts
Trade Discounts
A percentage deduction from the list orcatalog price to arrive at the gross selling
(invoice) price
Know the three reasons for using (p. 213)
Not recorded on either sellerNot recorded on either sellers or buyers or buyerss
books!!books!!ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least
1,000 of their most popularproduct known as Zippy. EachZippy has a list price of $5.25.
ExampleFastBan, Inc. offers a 30% tradediscount if you purchase at least
1,000 of their most popularproduct known as Zippy. EachZippy has a list price of $5.25.
Quantity sold 1,000
Price per unit 5.25$
Total 5,250
Less 30% discount (1,575)
Invoice price 3,675$
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Two Types of DiscountsTwo Types of Discounts
Cash Discounts
A deduction from the invoice price grantedto induce early payment of the amount due
Two other names for cash discounts
Sales discounts
Purchase discounts
Recorded on whose books? Both sellers and buyers books
They are pervasive
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Two Types of DiscountsTwo Types of Discounts
Cash Discounts
A deduction from the invoice price grantedto induce early payment of the amount due
Two other names for cash discounts
Sales discounts
Purchase discounts
Recorded on whose books? Both sellers and buyers books
They are pervasive
3/15,n/303/15,n/30Number of
DaysDiscount isAvailable
Number ofDays
Discount isAvailable
Otherwise,Net (or All)
is Due
Otherwise,Net (or All)
is Due
In ThisNumber of
Days
In ThisNumber of
Days
DiscountPercent
DiscountPercent
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Cash (Sales) Discount ExampleCash (Sales) Discount Example
On November 8, Borey Co. soldmerchandise to West, Inc. for $6,000 on
account; credit terms 2/10, n/30.General Journal Page 61
Date Description PR Debit Credit
Nov. 8 Accounts Receivable 6,000
Sales 6,000
To record the sale on account
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Cash (Sales) Discount ExampleCash (Sales) Discount Example
On November 14, West, Inc. paid itsaccount in full.
General Journal Page 68Date Description PR Debit Credit
Nov. 14 Cash 5,880
Sales Discount 120
Accounts Receivable 6,000
To record cash received on account
Discount = $6,000Discount = $6,000 2% = $1202% = $120
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Other Deductions from SalesOther Deductions from Sales
Sales Return
Merchandise returned by the buyer as
unsatisfactory or defective. Sales Allowance
A deduction from the original invoice pricewhen the customer keeps merchandise
but is dissatisfied with it.
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Sales Returns and AllowancesSales Returns and AllowancesExampleExample
Before making a payment to you, a customerreturns $135 of goods sold on account.
General Journal Page 68Date Description PR Debit Credit
Sales Returns and Allowances 135
Accounts Receivable 135
To record return of defective item.
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Partial Income StatementPartial Income Statement
Gross salesLess: Sales discounts
Less: Sales returns and allowances
Net sales
Sales discounts and Salesreturns and allowances areContra Revenue accounts.
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Inventory MethodsInventory Methods
Perpetual Method
Periodic Method
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Perpetual MethodPerpetual Method
The inventory account is continuouslyup-dated as purchases and sales of
inventory occur.
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Perpetual MethodPerpetual Method
The inventory account is continuouslyup-dated as purchases and sales of
inventory occur.
More on this method in Chapter 7.
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Periodic MethodPeriodic Method
This is the method used in this chapter.
Entries are not made to the inventory
account during the year.At the end of the accounting period, aphysical count of inventory is neededto update the inventory account and
calculate cost of goods sold.What is the mechanism for updating the
inventory account?
Closing entries
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Closing Entries forClosing Entries for
Merchandising CompanyMerchandising Company
General Journal Page 88Date Description
PR Debit Credit
Sales
Purchase Discounts
Purchase Returns and Allowances
Merchandising Inventory (ending)
Income Summary
To close accounts with credit balances and set
up proper balance in ending inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #1232 233
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Closing Entries forClosing Entries for
Merchandising CompanyMerchandising Company
General Journal Page 88Date Description
PR Debit Credit
Other accounts including all expenses
Sales Discounts
Sales Returns and Allowances
Merchandising Inventory (beginning)
Income Summary
To close accounts with debit balances includingthe beginning inventory account.
Dec. 31 XXX
XXX
XXX
XXX
XXX
Closing Entry #2
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Cost of Goods SoldCost of Goods Sold
...is an expense representing the cost of theinventory sold during the period.
...appears on the income statement.
...must be calculated using a multiple-stepprocess when using the periodic method.
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Beginning Inventory
+ Purchases
- Purchase Discounts
- Purchase Returns and Allowances
+ Transportation-in
= Cost of Goods Available for Sale- Ending Inventory
= Cost of Goods Sold
Calculation ofCalculation of
Cost of Goods SoldCost of Goods Sold
MultipleMultiple--Step ProcessStep Process
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Cost of goods sold:
Merchandise inventory, January 1, 1999 24,000$
Purchases: 167,000$
Less: Purchase discounts 3,000$
Purchase returns and allowances 8,000 11,000
Net purchases 156,000
Add: Transportation-in 10,000
Net cost of purchases 166,000
Cost of goods available for sale 190,000
Less: Merchandise inventory, December 31, 1999 31,000
Cost of goods sold 159,000$
Calculation ofCalculation of
Cost of Goods SoldCost of Goods Sold
Formal Income Statement PresentationFormal Income Statement Presentation
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Purchase of MerchandisePurchase of Merchandise
One May 7, Barbee, Inc. purchased$27,000 of merchandise on account;
terms 2/10, n/30.General Journal Page 26
Date Description PR Debit Credit
May 7 Purchases 27,000
Accounts Payable 27,000
Purchase merchandise on account
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General Journal Page 41Date Description PR Debit Credit
May 16 Accounts Payable 27,000
Cash 26,460
Purchase Discounts 540
Payment on account
$27,000 2% = $540 discount
Purchase of MerchandisePurchase of Merchandise
One May 16, Barbee, Inc. paid for thepurchase of May 7 in full.
Purchase Discounts is a
Contra PurchasesContra Purchasesaccount.
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Purchase Returns and AllowancesPurchase Returns and Allowances
The buyer returns, or accepts a reduction ininvoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defectivemerchandise purchased on account beforepayment is made to the supplier.
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Purchase Returns and AllowancesPurchase Returns and Allowances
The buyer returns, or accepts a reduction ininvoice price of, merchandise to the seller.
On May 27, Barbee, Inc. returns $200 of defectivemerchandise purchased on account beforepayment is made to the supplier.
General JournalPage 88
Date Description PR Debit Credit
May 27 Accounts Payable 200
Purchase Returns and Allowances 200
Returned defective merchandise
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Transportation CostsTransportation Costs
Transportation-In
Inward freight costs of acquiringmerchandise.
Transportation-In is
part of cost of goods sold!
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Transportation CostsTransportation Costs
Transportation Out/Delivery Expense
Outgoing freight costs that must be paid bythe seller.
Delivery Expense is a
selling expense on the
income statement!
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Transportation CostsTransportation Costs
Free on Board (FOB) Shipping Point.
FOB Destination.
Freight Prepaid Freight Collect
Who pays the
freight charges?
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FOB PointsFOB Points
ABC Wholesalers
FOB what? (Pick one)FOB what? (Pick one)
Shipping PointShipping Point
DestinationDestination
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FOB Shipping Point Free on board at the shipping (selling) point
Title passes to buyer upon shipment
Buyer owns en route and... Ultimately bears the cost of the freight
Assumes risk of loss in transit
FOB Destination Free on board at the destination point
Seller owns en route and... Ultimately bears the cost of the freight
Assumes risk of loss in transit
FOB PointsFOB Points
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Transportation Cost SummaryTransportation Cost Summary
Terms
Initially
Pays
Ultimately
Bears
Expense
FOB Shipping Point - Freight Collect Buyer Buyer
FOB Destination - Freight Prepaid Seller Seller
FOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
223
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Transportation Cost SummaryTransportation Cost Summary
Terms
Initially
Pays
Ultimately
Bears
Expense
FOB Shipping Point - Freight Collect Buyer Buyer
FOB Destination - Freight Prepaid Seller Seller
FOB Destination - Freight Collect Buyer Seller
FOB Shipping Point - Freight Prepaid Seller Buyer
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Prepare the journal entries for Jackson Co. Usethe periodic inventory method.
July 5, 1998 Purchased 1,000 units of inventoryfor $25,000 cash.
July 9, 1998 Sold 300 units of inventory to acustomer on account for $35 perunit.
Periodic MethodPeriodic Method
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Periodic MethodPeriodic Method
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchasesAt Cost
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Periodic MethodPeriodic Method
GENERAL JOURNAL Page 1
Date Description PR Debit Credit
July 5 Purchases 25,000
Cash 25,000
To record inventory purchases
July 9 Accounts Receivable 10,500
Sales 10,500
To record inventory sales
300 units $35 = $10,500
At Retail
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Saturday Night Page, AgainSaturday Night Page, AgainP. 226P. 226
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Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold
Beginning Inventory (BI) 55,000$Purchases (P) 176,500
Cost of Goods Avail. for Sale (GAS) 231,500
Less: Ending Inventory (EI) 64,000
Cost of Goods Sold (COGS) 167,500$
Three approaches to Cost of Goods Sold:
(1) Simplified Income Statement Approach
(2) Equation Approach
COGS = BI + P - EI
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Classified Income Statement:Classified Income Statement:Cost of Goods SoldCost of Goods Sold
Beginning Inventory 55,000$
Purchases 175,000$Less: Purchase Discounts 6,000$
Purchase Ret. & Allow. 2,500 8,500
Net Purchases 166,500$
Add: Transportation-in 10,000Net Cost of Purchases 176,500
Cost of Goods Avail. for Sale 231,500$
Less: Ending Inventory 64,000
Cost of Goods Sold 167,500$
(3) Formal Income Statement Approach
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Classified Income Statement:Classified Income Statement:Gross MarginGross Margin
Net Sales 245,500$
Cost of Goods Sold 167,500
Gross Margin 78,000$
Gross Margin = Net Sales - COGS
Gross Margin is also called Gross ProfitGross Profit
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Classified Income Statement:Classified Income Statement:Types of Operating ExpensesTypes of Operating Expenses
Selling Expenses
Administrative Expenses
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Gross margin 78,000$
Operating expenses:
Selling expenses:
Sales salaries 26,000$
Delivery expense 3,000Advertising expense 2,000
Rent - store building 4,000
Depreciation - store equip. 2,500 37,500
Administrative expenses:
Executive salaries 29,000
Rent - office building 1,600Insurance expense 1,500
Supplies expense 1,100 33,200
Total operating expenses 70,700
Income from operations 7,300$
Classified Income Statement:Classified Income Statement:Income from OperationsIncome from Operations
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Classified Income Statement:Classified Income Statement:Types ofTypes ofNonoperatingNonoperating ItemsItems
Nonoperating Revenues
Nonoperating Expenses
Income from operations 7,300$Nonoperating revenues and expenses
Nonoperating revenues:
Interest revenue 400
Rent Revenue 2,000
Nonoperating expenses:
Interest expense (700)
Safe deposit box rental 100
Net income 9,100$
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Work Sheet and Closing EntriesWork Sheet and Closing EntriesAppx. 231
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Gross MarginGross Margin PercentagePercentage
Percentage of each sales dollar availableto cover expenses and a profit
GROSS MARGIN
NET SALES
GM% =
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WE CAN LOOK FORWARDTO A CLOSER INSPECTION
OF INVENTORY IN
CHAPTER 7!
THE ENDTHE END
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