Chapter6 Merchandise Inventory

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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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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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


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.


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


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


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


May 7 Purchases 27,000

Accounts Payable 27,000

Purchase merchandise on account


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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


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 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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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

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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.



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July 5 Purchases 25,000

Cash 25,000

To record inventory purchasesAt Cost


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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

Documents

Chapter6 Merchandise Inventory