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PowerPoint Authors:Susan Coomer Galbreath, Ph.D., CPACharles W. Caldwell, D.B.A., CMAJon A. Booker, Ph.D., CPA, CIACynthia J. Rooney, Ph.D., CPA

Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 5

Accounting for Merchandising Operations

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Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms, and plumbing services

Service organizations sell time to earn revenue.

Examples: Accounting firms, law firms, and plumbing services

Service CompaniesC 1

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Manufacturer Wholesaler Retailer Consumers

Merchandising Companies

MerchandiserC 1

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C 1 Reporting Income for a Merchandiser

Merchandising companies sell products to earn revenue.

Examples: sporting goods, clothing, and auto parts stores

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Operating Cycle for a Merchandiser

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

of merchandise.

C 2

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Inventory SystemsC 2

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Perpetual systems continually update

accounting records for merchandising transactions

Periodic systemsaccounting records

relating to merchandise transactions are updated only at the end of the accounting period

C 2

Inventory Systems

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Merchandise Purchases

On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash.

P1

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Trade Discounts

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

purchased.

ExampleZ-Mart offers a 30% trade

discount for orders of 1,000units or more on its popular

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

ExampleZ-Mart offers a 30% trade

discount for orders of 1,000units or more on its popular

product Racer. Each Racer 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$

P1

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P1 Accounting for Merchandise Purchases

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Purchase Discounts

A deduction from the invoice price granted to induce early payment of the amount due.

P1

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2/10,n/30Discount Percent

Number of Days

Discount Is Available

Otherwise, Net (or All) Is Due in 30

Days

CreditPeriod

Purchase DiscountsP1

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On November 2, Z-Mart purchased $1,200 of merchandise inventory on account,

credit terms are 2/10, n/30.

Purchase DiscountsP1

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On November 12, Z-Mart paid the amount due on the purchase of November 2.

Purchase DiscountsP1

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Purchase Discounts

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

P1

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Purchase Returns and Allowances

Purchase Return . . . Merchandise returned by the purchaser to the

supplier.

Purchase Allowance . . . A reduction in the cost of defective or

unacceptable 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 or

unacceptable merchandise received by a purchaser from a supplier.

P1

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On November 15, Z-Mart (buyer) issues a $300 debit memorandum for an allowance from

Trex for defective merchandise.

Purchase Returns and Allowances

P1

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Z-Mart purchases $1,000 of merchandise on June 1 with terms 2/10, n/60. Two days later, Z-Mart returns $100 of goods before paying the invoice. When Z-Mart later pays on June 11, it takes

the 2% discount only on the $900 remaining balance.

Purchase Returns and Allowances

P1

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Transportation Costs and Ownership Transfer

P1

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Transportation Costs

Z-Mart purchased merchandise on terms of FOB shipping point. The transportation

charge is $75.

P1

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Accounting for MerchandiseP1

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Accounting for Merchandise Sales

P2

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Sales of Merchandise P2

Each sales transaction for a seller of merchandise involves two parts:

Revenue received in the form of an asset

from a customer.

Recognition of the cost of merchandise sold to a customer.

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On November 3, Z-Mart sold $2,400 of merchandise on credit. The merchandise has a

cost basis to Z-Mart of $1,600.

Sales of Merchandise P2

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Sales DiscountsP2

Sales discounts on credit sales can benefit a seller by decreasing the delay in receiving cash and reducing future

collection efforts.

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Z-Mart completes a $1,000 credit sale with terms of 2/10, n/60.

Sales DiscountsP2

The account was paid in full within the 60-day period.

The account was paid in full within the 10-day discount period.

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Sales Returns and AllowancesP2

Sales returns and allowances usually involve dissatisfied customers and the possibility of

lost future sales.

Sales returns refer to merchandise that customers return to

the seller after a sale.

Sales allowances refer to reductions in the selling price of

merchandise sold to customers.

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Recall Z-Mart’s sale for $2,400 that had a cost of $1,600. Assume the customer returns part of the merchandise. The returned items

sell for $800 and cost $600.

Sales Returns and AllowancesP2

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Assume that $800 of the merchandise Z-Mart sold on November 3 is defective but

the buyer decides to keep it because Z-Mart offers a $100 price reduction.

Sales AllowancesP2

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Merchandising Cost Flow in the Accounting Cycle

P2

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Adjusting Entries for Merchandisers

Z-Mart’s Merchandise Inventory account at the end of year 2013 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists.

P3

A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of

merchandise, including theft and deterioration.

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Closing Entries for MerchandisersP3

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P4

A multiple-step income

statement format shows

detailed computations of net sales and othercosts and

expenses, and reports

subtotals for various

classes of items.

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Single-Step Income StatementP4

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Classified Balance Sheet

HighlyLiquid

LessLiquid

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Global View

Accounting for Merchandise Purchases and SalesBoth U.S. GAAP and IFRS include broad and similar guidance

for the accounting of merchandise purchases and sales.

Financial Statement Differences1. Order of expenses2. Separate disclosures3. Presentation of expenses4. Classification of operating and

nonoperating expenses5. Alternative income6. Order of current and noncurrent

items on the balance sheet

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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 Assets

Current LiabilitiesAcid-Test

Ratio

Acid-TestRatio

= Cash + S-T Investments + Receivables

Current Liabilities

Acid-Test RatioA1

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Percentage of dollar sales available to

cover expenses and provide a profit.

GrossMarginRatio

Net Sales - Cost of Goods Sold Net Sales

=

Gross Margin RatioA2

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JCPenneyA1/A2

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Appendix 5A: Periodic Inventory System

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A periodic inventory

system requires updating the

inventory account only at

the end of a period to reflect the quantity and cost of both the goods available and the goods

sold.

(a)

(b)

(c)

(d)

(e)

(f)

(g)

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Appendix 5A: Periodic Inventory System

P5

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Appendix 5B: Worksheet—Perpetual System

P5

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End of Chapter 5