CH 05

Merchandising Operations and the Accounting Cycle
Chapter 5
2002 Prentice Hall, Inc.
Business Publishing
Accounting, 5/E
Horngren/Harrison/Bamber
5-1
Income Statements
Service Co. Income Statement Year ended June 30, 20xx Service revenue $xxx Expenses: Salary expense x Depreciation expense x Income tax expense x Net income $ xx
2002 Prentice Hall, Inc. Business Publishing
Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x Depreciation expense x Net income $ xx
Horngren/Harrison/Bamber 5-2
Accounting, 5/E
Objective 1 Use sales and gross profit to evaluate a company.
Business Publishing
Accounting, 5/E
5-3
Sales Revenue
Net sales
=
Sales Revenue less Sales Returns and Sales Discounts
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 5-4
Gross Profit or Gross Margin

Target Corporation Income Statement (Adapted) Year Ended December 31, 2000
Net sales revenue (same as Net sales) Cost of goods sold (same as Cost of sales) Gross profit (same as Gross margin) Expenses: Selling, general, administrative 7,490 Depreciation expense 854 Interest expense 393 Other expenses, net 302 Total operating expenses Net earnings (same as Net income)
2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E
Millions $33,212 23,029 10,183
9,039 $ 1,144
5-5
Operating Cycle of a Merchandising Business

Purchase and Cash Sale Purchase and Sale on Account
Cash
Cash
Accounts Receivable
Inventory
Inventory
Inventory Systems
Perpetual
Periodic
Business Publishing
Accounting, 5/E
5-7
Objective 2
Account for the purchase and sale of inventory.
Business Publishing
Accounting, 5/E
5-8
Purchase of Inventory
Merchant prepares purchase order
Suppliers send merchandise and a bill
Compares
Purchase of Inventory Example

On May 1, the Sporting Store acquired on account $2,000 of various items for resale. The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale. What is the journal entry?
Business Publishing
Accounting, 5/E
5 - 10
Purchase of Inventory Example

May 1 Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account Inventory Accounts Payable 2,000 2,000
Business Publishing
Accounting, 5/E
5 - 11
Recording Purchase Returns and Allowances Example

Assume that on May 4 a $100 item was returned prior to payment of the invoice. What is the journal entry?
May 4 Accounts Payable 100 Inventory 100 Merchandise was returned

2002 Prentice Hall, Inc. Business Publishing Accounting, 5/E Horngren/Harrison/Bamber 5 - 12

Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance. What is the journal entry?
May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance


Inventory 2,000 100 10 Bal. 1,890 Accounts Payable 100 2,000 10 Bal. 1,890
Business Publishing
Accounting, 5/E
5 - 14
Purchase Discounts
Credit terms are stated in expressions such as: 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days.
Business Publishing
Accounting, 5/E
5 - 15
Purchase Discounts Example

Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30. The store paid within the discount period. The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted.
Business Publishing
Accounting, 5/E
5 - 16
Purchase Discounts Example
What is the journal entry?

Accounts Payable 1,000 Cash 980 Inventory 20 To record payment of invoice within the discount period
Business Publishing
Accounting, 5/E
5 - 17
Recording Transportation Costs

Transportation costs are the cost of moving inventory from seller to buyer. FOB stands for Free on Board and governs the passing of title of the goods. Selling/buying agreements usually specify FOB terms.
Business Publishing
Accounting, 5/E
5 - 18
Recording Transportation Costs
FOB Shipping Point
FOB Destination
Business Publishing
Accounting, 5/E
5 - 19
Freight Charges Example

Assume that on May 9 the Sporting Store paid $60 for freight. What is the journal entry?
May 9 Inventory 60 Cash Paid a freight bill

60
Accounting, 5/E
5 - 20
Sporting Store Example

Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash. What are the journal entries?
Business Publishing
Accounting, 5/E
5 - 21

May 11 Cash 2,600 Sales Revenue 2,600 To record sale of merchandise
May 11 Cost of Goods Sold 1,800 Inventory 1,800 To record the cost of merchandise sold

On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000. Terms are 2/10, N/30.
Maria Gym Total

Invoice Terms 2/10, N/30 $5,000

Accounting, 5/E Horngren/Harrison/Bamber 5 - 23
Business Publishing
Sales Discounts and Sales Returns and Allowances Example

On May 17, Maria Gym returned $1,500 worth of goods that cost $900. In addition, a credit of $100 was allowed for merchandise that was damaged. What are the journal entries?
Business Publishing
Accounting, 5/E
5 - 24

May 17 Sales Returns and Allowance 1,500 Accounts Receivable 1,500 Received returned merchandise
May 17 Inventory Cost of Goods Sold Returned goods to inventory
900
900
Horngren/Harrison/Bamber 5 - 25

May 17 Sales Returns and Allowance 100 Accounts Receivable 100 Credit granted for damaged goods
There is no entry required for inventory since the goods were not returned.
Business Publishing
Accounting, 5/E
5 - 26

On May 20, the store received a check from Maria Gym for the balance due. What is the balance due?
Accounts Receivable May 15 = $5,000 Less May 17 returns and allowances $1,600 Equals May 20 balance due of $3,400
Maria took advantage of the sales terms 2/10, N/30.
May 20 Cash 3,332 Sales Discounts 68 Accounts Receivable 3,400 Cash collected within the discount period
Objective 3
Adjust and close the accounts of a merchandising business.
Business Publishing
Accounting, 5/E
5 - 29
Adjustments to Inventory Example

Book Inventory Balance $255,000 Physical Count $252,500
$2,500 difference
Business Publishing
Accounting, 5/E
5 - 30
Adjustments to Inventory Example
What is the journal entry?

December 31 Cost of Goods Sold 2,500 Inventory 2,500 To adjust inventory to physical count
Business Publishing
Accounting, 5/E
5 - 31
Closing Entries for a Merchandising Business

Revenues
2,760,000 7,348
Income Summary
1,884,348 2,767,348 1,490,400
C.G.S.
883,000
Sales Discount
22,824
Returns and A.
32,605
Capital Account
338,519 883,000
Accounting, 5/E Horngren/Harrison/Bamber 5 - 32 Business Publishing
Other Exp.
Objective 4
Prepare a merchandisers financial statements.
Business Publishing
Accounting, 5/E
5 - 33
Income Statement Formats
There are two basic formats for the income statement: Multi-step Single-step
Business Publishing
Accounting, 5/E
5 - 34
Multi-Step Format
Sporting Store Income Statement Year Ended December 31, 2002 Sales revenue $2,760,000 Sales discounts 22,824 Returns and allowances 32,605 Net sales revenue $2,704,571 Cost of goods sold 1,490,400 Gross margin
$1,214,171
Multi-Step Format
Gross margin Operating expenses: Wage expense Rent expense Insurance expense Depreciation expense Supplies expense
Operating income
$1,214,171
166,285 137,000 16,302 9,781 8,151 $ 876,652
Multi-Step Format
Operating income Other revenue and expenses: Interest revenue Interest expense Net income
$876,652
7,348 1,000
$883,000
Business Publishing
Accounting, 5/E
5 - 37
Single-Step Format
Sporting Store Income Statement Year Ended December 31, 2002 Revenues: Net sales (net of sales discounts) $2,704,571 Interest revenue 7,348 Total revenues
$2,711,919
Single-Step Format
Expenses: Cost of goods sold Wage expense Rent expense Interest expense Insurance expense Depreciation expense Supplies expense Total expenses Net income
$1,490,400 166,285 137,000 1,000 16,302 9,781 8,151 $1,828,919 $ 883,000

Objective 5
Use the gross margin percentage and the inventory turnover ratio to evaluate a business.
Business Publishing
Accounting, 5/E
5 - 40
Using the Financial Statements for Decision Making

Gross profit percentage = Gross profit Net sales revenue Inventory turnover = Cost of goods sold Average inventory
Business Publishing
Accounting, 5/E
5 - 41
Gross Profit on $1 for Three Merchandisers

$1.00 $0.75 $0.50 Gross margin $0.45 Gross margin $0.42 Cost of goods sold $0.58 Gross margin $0.21 Cost of goods sold $0.79
$0.25
$0.00
Cost of goods sold $0.55
Austin Sound
Target Wal-Mart Corporation Stores, Inc.

Accounting, 5/E Horngren/Harrison/Bamber 5 - 42
Rate of Inventory Turnover for Three Merchandisers

Wal-Mart Stores, Inc. 1 2 3 4 5 6 7 5.4 times per year 5 2.3 times per year 2 Jun Sep
Accounting, 5/E
7.0 times per year
Target Corporation 1 2 3 4
Austin Sound
1 Jan Mar
Dec
5 - 43
Objective 6
Compute the cost of goods sold.
Business Publishing
Accounting, 5/E
5 - 44
Computing the Cost of Goods Sold in a Periodic System

Purchases of inventory Purchases discounts Purchases returns and allowances = Net purchases Beginning inventory + Net purchases + Freight-in = Cost of goods available for sale
Cost of goods available for sale Ending inventory = Cost of goods sold
Computing the Cost of Goods Sold in a Periodic System

Beginning Inventory $20,000 Ending Inventory $15,000 Cost of Goods Sold $106,000
Purchases and Freight-In $101,000

Cost of Goods Available for Sale $121,000
Business Publishing
Accounting, 5/E
5 - 46
End of Chapter 5
Business Publishing
Accounting, 5/E
5 - 47

CH 05

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CH 05

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Merchandising Operations and the Accounting Cycle

2002 Prentice Hall, Inc.

Objective 1 Use sales and gross profit to evaluate a company.

2002 Prentice Hall, Inc.

Gross Profit or Gross Margin

Millions $33,212 23,029 10,183

Operating Cycle of a Merchandising Business

2002 Prentice Hall, Inc.

Account for the purchase and sale of inventory.

2002 Prentice Hall, Inc.

Merchant prepares purchase order

Suppliers send merchandise and a bill

Purchase of Inventory Example

2002 Prentice Hall, Inc.

Purchase of Inventory Example

2002 Prentice Hall, Inc.

Recording Purchase Returns and Allowances Example

May 4 Accounts Payable 100 Inventory 100 Merchandise was returned

Recording Purchase Returns and Allowances Example

May 4 Accounts Payable 10 Inventory 10 Received a purchase allowance

Recording Purchase Returns and Allowances Example

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

Purchase Discounts Example

2002 Prentice Hall, Inc.

Purchase Discounts Example

What is the journal entry?

2002 Prentice Hall, Inc.

Recording Transportation Costs

2002 Prentice Hall, Inc.

Recording Transportation Costs

FOB Shipping Point

2002 Prentice Hall, Inc.

Freight Charges Example

May 9 Inventory 60 Cash Paid a freight bill

Sporting Store Example

2002 Prentice Hall, Inc.

Sporting Store Example

Sporting Store Example

Maria Gym Total

Invoice Terms 2/10, N/30 $5,000

Sales Discounts and Sales Returns and Allowances Example

2002 Prentice Hall, Inc.

Sales Discounts and Sales Returns and Allowances Example

Sales Discounts and Sales Returns and Allowances Example

2002 Prentice Hall, Inc.

Sales Discounts and Sales Returns and Allowances Example

Sales Discounts and Sales Returns and Allowances Example

Maria took advantage of the sales terms 2/10, N/30.

2002 Prentice Hall, Inc.

Adjustments to Inventory Example

2002 Prentice Hall, Inc.

Adjustments to Inventory Example

What is the journal entry?

2002 Prentice Hall, Inc.

Closing Entries for a Merchandising Business

Prepare a merchandisers financial statements.

2002 Prentice Hall, Inc.

Income Statement Formats

2002 Prentice Hall, Inc.

2002 Prentice Hall, Inc.

$1,490,400 166,285 137,000 1,000 16,302 9,781 8,151 $1,828,919 $ 883,000