Accounting Principles, 9e

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Chapter5-1



Chapter5-2

Chapter 5

Accounting forMerchandising

Operations

Accounting Principles, Ninth Edition



Chapter5-3

1. Identify the differences between service andmerchandising companies.

2. Explain the recording of purchases under a perpetualinventory system.

3. Explain the recording of sales revenues under aperpetual inventory system.

4. Explain the steps in the accounting cycle for amerchandising company.

5. Distinguish between a multiple-step and a single-stepincome statement.

6. Explain the computation and importance of gross profit.

Study Objectives



Chapter5-4

Forms ofFinancial

Statements

Accounting for Merchandising Operations

Freight costs

Purchasereturns andallowances

Purchasediscounts

Summary ofpurchasingtransactions

Merchandising

Operations

RecordingPurchases ofMerchandise

RecordingSales of

Merchandise

Completingthe

AccountingCycle

Operatingcycles

Flow ofcosts—perpetual andperiodic

inventorysystems

Sales returnsandallowances

Salesdiscounts

Adjustingentries

Closing entries

Summary ofmerchandisingentries

Multiple-stepincomestatement

Single-stepincomestatement

Classifiedbalance sheet



Chapter5-5

Merchandising Operations

SO 1 Identify the differences between service and merchandising companies.

Merchandising CompaniesBuy and Sell Goods

Wholesaler Retailer Consumer

The primary source of revenues is referred to assales revenue or sales.



Chapter5-6

Merchandising Operations

Income Measurement

Illustration 5-1

Cost of goods sold is the totalcost of merchandise sold

during the period.

Not used in aService business.

NetIncome(Loss)

Less

LessEquals

Equals

SalesRevenue

Cost ofGoods Sold

GrossProfit

OperatingExpenses




Chapter5-7

The operatingcycle of amerchandising

company ordinarily islonger than thatof a service

company.

Operating Cycles

Illustration 5-2




Chapter5-8

Features:

Perpetual System

1. Purchases increase Merchandise Inventory.

2. Freight costs, Purchase Returns and Allowances and

Purchase Discounts are included in Merchandise Inventory.

3. Cost of Goods Sold is increased and Merchandise Inventoryis decreased for each sale.

4. Physical count done to verify Merchandise Inventory

balance.

The perpetual inventory system provides a continuous recordof Merchandise Inventory and Cost of Goods Sold.

Flow of Costs




Chapter5-9

Features:Periodic System

1. Purchases of merchandise increase Purchases.

2. Ending Inventory determined by physical count.3. Calculation of Cost of Goods Sold:

Flow of Costs

Beginning inventory $ 100,000Add: Purchases, net 800,000

Goods available for sale 900,000Less: Ending inventory 125,000Cost of goods sold $ 775,000




Chapter5-10

Made using cash orcredit (on account).

Normally recorded when

goods are received.Purchase invoice shouldsupport each creditpurchase.

Recording Purchases of Merchandise

SO 2 Explain the recording of purchases under a perpetual inventory system.

Illustration 5-5



Chapter5-11

Under the perpetual inventory system, companies record in theMerchandise Inventory account the purchase of goods theyintend to sell.

Illustration: From INVOICE NO. 731 (Illustration 5-5) recordthe journal entry Sauk Stereo would make to record itspurchase from PW Audio Supply.

Merchandise inventory 3,800May 4Accounts payable 3,800





Chapter5-12

Illustration 5-6

Seller places goods FreeOn Board the carrier, and

buyer pays freight costs.

Seller places goods Free

On Board to the buyer’splace of business, and

seller pays freight costs.


Freight Costs – Terms of Sale

Freight costs incurred by the seller are an operating expense.



Chapter5-13

Illustration: Assume upon delivery of the goods on May 6,Sauk Stereo pays Acme Freight Company $150 for freightcharges, the entry on Sauk Stereo’s books is:

Merchandise inventory 150May 6

Cash 150



Assume the freight terms on the invoice in Illustration 5-5had required PW Audio Supply to pay the freight charges, theentry by PW Audio Supply would have been:

Freight-out (or Delivery Expense) 150May 6

Cash 150



Chapter5-14

Purchaser may be dissatisfied because goods aredamaged or defective, of inferior quality, or do not

meet specifications.

Purchase Returns and Allowances


Return goods for creditif the sale was made on

credit, or for a cashrefund if the purchase

was for cash.

May choose to keep themerchandise if the seller

will grant an allowance(deduction) from the

purchase price.

Purchase Return Purchase Allowance




Chapter5-15

In a perpetual inventory system, a return ofdefective merchandise by a purchaser isrecorded by crediting:

a. Purchases

b. Purchase Returns

c. Purchase Allowanced. Merchandise Inventory

Question





Chapter5-16



Illustration: Assume that on May 8 Sauk Stereo returned toPW Audio Supply goods costing $300.

Accounts payable 300May 8

Merchandise inventory 300



Chapter5-17

Credit terms may permit buyer to claim a cashdiscount for prompt payment.

Advantages:Purchaser saves money.

Seller shortens the operating cycle.

Purchase Discounts


Example: Credit terms of 2/10, n/30, is read “two-ten, netthirty.” 2% cash discount if payment is made within 10 days.




Chapter5-18

Purchase Discounts Terms


2% discount ifpaid within 10

days, otherwisenet amount due

within 30 days.

1% discount ifpaid within

first 10 days ofnext month.

2/10, n/30 1/10 EOM

Net amount duewithin the first10 days of thenext month.

n/10 EOM




Chapter5-19

Accounts payable 3,500May 14

Cash 3,430


Merchandise Inventory 70

(Discount = $3,500 x 2% = $70)


Illustration: Assume Sauk Stereo pays the balance due of$3,500 (gross invoice price of $3,800 less purchase returnsand allowances of $300) on May 14, the last day of thediscount period. Prepare the journal entry Sauk makes to

record its May 14 payment.



Chapter5-20

Accounts payable 3,500June 3


Cash 3,500


Illustration: If Sauk Stereo failed to take the discount, andinstead made full payment of $3,500 on June 3, the journalentry would be:



Chapter5-21

Should discounts be taken when offered?Purchase Discounts


Discount of 2% on $3,500 70.00$

$3,500 invested at 10% for 20 days 19.18

Savings by taking the discount 50.82$

Example: 2% for 20 days = Annual rate of 36.5%

(365/20 = 18.25 twenty-day periods x 2% = 36.5%)

Passing up the discount offered equates to paying an

interest rate of 2% on the use of $3,500 for 20 days.




Chapter5-22

Merchandise Inventory

Debit Credit

$3,800 8th - Return$300

Balance

4th - Purchase

$3,580

70 14th - Discount


Summary of Purchasing Transactions

1506th – Freight-in

Illustration




Chapter5-23

Made for cash or credit (on account).

Normally recorded whenearned, usually when

goods transfer fromseller to buyer.

Sales invoice shouldsupport each creditsale.

Recording Sales of Merchandise

SO 3 Explain the recording of sales revenues under a perpetual inventory system.

Illustration 5-5



Chapter5-24

Two Journal Entries to Record a Sale

Cash or Accounts receivable XXX

Sales XXX



#1

Cost of goods sold XXX

Merchandise inventory XXX

#2

Selling

Price

Cost



Chapter5-25



Accounts receivable 3,800May 4

Sales 3,800

Illustration: Assume PW Audio Supply records its May 4sale of $3,800 to Sauk Stereo (Illustration 5-5) as follows.Assume the merchandise cost PW Audio Supply $2,400.

Cost of goods sold 2,4004

Merchandise inventory 2,400



Chapter5-26

“Flipside” of purchase returns and allowances.

Contra-revenue account (debit).

Sales not reduced (debited) because:

would obscure importance of sales returns andallowances as a percentage of sales.

could distort comparisons between total salesin different accounting periods.

Sales Returns and Allowances





Chapter5-27

Illustration: Prepare the entry PW Audio Supply would maketo record the credit for returned goods that had a $300selling price (assume a $140 cost). Assume the goods werenot defective.



Sales returns and allowances 300May 8

Accounts receivable 300

Merchandise inventory 1408Cost of goods sold 140



Chapter5-28

Illustration: Assume the returned goods were defective andhad a scrap value of $50, PW Audio would make the followingentries:



Sales returns and allowances 300May 8Accounts receivable 300


Cost of goods sold 50



Chapter5-29

The cost of goods sold is determined andrecorded each time a sale occurs in:

a. periodic inventory system only.b. a perpetual inventory system only.

c. both a periodic and perpetual inventory

system.d. neither a periodic nor perpetual inventory

system.

Review Question





Chapter5-30



Chapter5-31

Offered to customers to promote prompt payment.

“Flipside” of purchase discount.

Contra-revenue account (debit).

Sales Discount





Chapter5-32



Cash 3,430May 14

Accounts receivable 3,500

Sales discounts 70

* [($3,800 – $300) X 2%]

*

Illustration: Assume Sauk Stereo pays the balance due of$3,500 (gross invoice price of $3,800 less purchase returnsand allowances of $300) on May 14, the last day of thediscount period. Prepare the journal entry PW Audio Supply

makes to record the receipt on May 14.



Chapter5-33

Q5-9 Joan Roland believes revenues from credit

sales may be earned before they are

collected in cash. Do you agree? Explain.

Discussion Question

See notes page for discussion





Chapter5-34

Generally the same as a service company.

One additional adjustment to make the records

agree with the actual inventory on hand.

Involves adjusting Merchandise Inventory andCost of Goods Sold.

Adjusting Entries

Completing the Accounting Cycle

SO 4 Explain the steps in the accounting cycle for a merchandising company.



Chapter5-35


SO 4 Explain the steps in the accounting cycle for a merchandising company.

Illustration: Suppose that PW Audio Supply has anunadjusted balance of $40,500 in Merchandise Inventory.Through a physical count, PW Audio determines that its actualmerchandise inventory at year-end is $40,000. The company

would make an adjusting entry as follows.

Cost of goods sold 500




Chapter5-36


Closing

Entries



Chapter5-37

Shows several steps in determining net income.

Two steps relate to principal operating

activities.

Distinguishes between operating and non-operating activities.

Multiple-Step Income Statement

Forms of Financial Statements

SO 5 Distinguish between a multiple-step and a single-step income statement.



Chapter5-38 SO 6 Explain the computation and importance of gross profit.

Illustration 5-13

Key Items:Net sales

Gross profit

Gross profitrate

Illustration 5-10

Calculation of Gross Profit

Illustration 5-13



Chapter5-39


Key Items:

Net sales

Gross profit

Operatingexpenses


Multiple-Step

Illustration 5-13



Chapter5-40


Key Items:

Net sales

Gross profitOperatingexpenses

Nonoperating

activitiesNet income




Chapter5-41

The multiple-step income statement for amerchandiser shows each of the followingfeatures except:

a. gross profit.

b. cost of goods sold.

c. a sales revenue section.

d. investing activities section.

Review Question





Chapter5-42

Subtract total expenses from total revenues

Two reasons for using the single-step format:

1) Company does not realize any type of profituntil total revenues exceed total expenses.

2) Format is simpler and easier to read.

Single-Step Income Statement





Chapter5-43

Illustration 5-14

Single-Step





Chapter5-44


Illustration 5-15Classified Balance Sheet




Chapter5-45

Periodic System Separate accounts used to record purchases,freight costs, returns, and discounts.

Company does not maintain a running accountof changes in inventory.

Ending inventory determined by physical count.

SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Periodic Inventory System



Chapter5-46

Calculation of Cost of Goods Sold

$316,000

Illustration 5A-1


Periodic Inventory System



Chapter5-47

Calculation of Cost of Goods Sold (Periodic System)

Example: Aerosmith Company’s accounting records show the

following at year-end: Purchase Discounts $3,400; Freight-in$6,100; Sales $240,000; Purchases $162,500; BeginningInventory $18,000; Ending Inventory $20,000; Sales Discounts$10,000; Purchase Returns $5,200; and Operating Expenses$57,000. Compute the following for Aerosmith: net sales, costof goods purchased, cost of goods sold, gross profit, and netincome.Solution (1st Part):Net Sales: Sales – Sales Return & Allowance - Sales Discounts

= $240,000 – 0 – $10,000 = $230,000Cost of Goods Purchased: Purchases – Purchase Returns – Purchase

Discounts + Freight-in= $162,500 - $5,200 - $3,400 + $6,100 = $160,000

Cost of Goods Sold: Beginning Inventory + Cost of Goods Purchased– Ending Inventory

= $18,000 + $160,000 – 20,000 = $158,000



Chapter5-48

Calculation of Cost of Goods Sold (Periodic System)

Example: Aerosmith Company’s accounting records show the

following at year-end: Purchase Discounts $3,400; Freight-in$6,100; Sales $240,000; Purchases $162,500; BeginningInventory $18,000; Ending Inventory $20,000; Sales Discounts$10,000; Purchase Returns $5,200; and Operating Expenses$57,000. Compute the following for Aerosmith: net sales, costof goods purchased, cost of goods sold, gross profit, and netincome.Solution (2nd Part):Gross Profit: Net Sales – Cost of Goods Sold

= $230,000 - $158,000 = $72,000Net Income: Gross Profit – Operating Expenses

= $$72,000 - $57,000 = $15,000



Chapter

5-49

Recording Purchases under Periodic System


Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW AudioSupply, Sauk Stereo records the $3,800 purchase as follows.

Purchases 3,800May 4

Accounts payable 3,800



Chapter

5-50



Illustration: If Sauk pays Haul-It Freight Company $150for freight charges on its purchase from PW Audio Supply on

May 6, the entry on Sauk’s books is:

Freight-in (Transportation-in) 150May 6

Cash 150

Freight Costs



Chapter

5-51



Illustration: Sauk Stereo returns $300 of goods to PW AudioSupply and prepares the following entry to recognize the

return.

Accounts payable 300May 8

Purchase returns and allowances 300

Purchase Returns and Allowances



Chapter

5-52



Illustration: On May 14 Sauk Stereo pays the balance due onaccount to PW Audio Supply, taking the 2% cash discount

allowed by PW Audio for payment within 10 days. SaukStereo records the payment and discount as follows.

Accounts payable 3,500May 14

Purchase discounts 70

Purchase Discounts

Cash 3,430



Chapter

5-53

No entry is recorded for cost of goods sold at the time ofthe sale under a periodic system.


Recording Sales under Periodic System

Illustration: PW Audio Supply, records the sale of $3,800 ofmerchandise to Sauk Stereo on May 4 (sales invoice No. 731,Illustration 5-5) as follows.

Accounts receivable 3,800May 4

Sales 3,800



Chapter

5-54 SO 7 Explain the recording of purchases and sales of inventory under a periodic inventory system.

Illustration: To record the returned goods received fromSauk Stereo on May 8, PW Audio Supply records the $300

sales return as follows.

Sales returns and allowances 300May 4

Accounts receivable 300

Sales Returns and Allowances




Chapter


Illustration: On May 14, PW Audio Supply receives payment of$3,430 on account from Sauk Stereo. PW Audio honors the 2%

cash discount and records the payment of Sauk’s accountreceivable in full as follows.

Sales Discounts


Cash 3,430May 14

Accounts receivable 3,500

Sales discounts 70



Chapter


Comparison of Entries — Perpetual Vs. Periodic

Illustration 5A-2



Chapter


Comparison of Entries — Perpetual Vs. Periodic

Illustration 5A-2



Chapter

5-58

Worksheet for a Merchandising Company

Illustration 5B-1



Ch t

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Accounting Principles, 9e