Merchandising Operations and the Accounting Cycle pdf

Cost of goods sold x Gross profit xx Operating expenses:Salary expense x Merchandising Co.. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goods sold x Gross pro

Merchandising

Operations and the Accounting Cycle

Chapter

5

Cost of goods sold x Gross profit xx Operating expenses:

Salary expense x

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

Income Statements

Account for the purchase

of inventory.

Objective 1

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?

May 1

Inventory $2,000

Accounts Payable $2,000

Purchased inventory on account

Inventory Accounts Payable 2,000 2,000

Purchase of Inventory Example

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

Recording Purchase Returns

and Allowances Example

✔Assume that one of the items of merchandise

is slightly damaged, and the store was given

Recording Purchase Returns

and Allowances Example

Inventory 2,000 100

10

Bal 1,890

Accounts Payable

100 2,000 10

Bal 1,890

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

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

Purchase Discounts Example

✔What is the journal entry?

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

Recording Transportation Costs

FOB Shipping Point

FOB Destination

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 60

Objective 2

Account for the sale of inventory

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?

Sporting Store Example

Sporting Store Example

✔On May 15, the store sold to Maria Gym

$5,000 worth of merchandise with a cost

Sales Discounts and Sales

Returns and Allowances

Sales Discounts and Sales

Returns and Allowances

Sales Discounts and Sales

Returns and Allowances

Accounts Receivable May 15 = $5,000

Less May 17 returns and allowances $1,600

Sales Discounts and Sales

Returns and Allowances

Sales Discounts and Sales

Returns and Allowances

Use sales and gross profit

to evaluate a company.

Objective 3

Net sales

Sales Revenue less Sales Returns and Sales Discounts

=

Sales Revenue

Target Corporation Income Statement (Adapted) Year Ended December 31, 2000

Net sales revenue (same as Net sales) $33,212 Cost of goods sold (same as Cost of sales) 23,029 Gross profit (same as Gross margin) 10,183 Expenses:

Selling, general, administrative 7,490

Depreciation expense 854

Interest expense 393

Net sales revenue (same as Net sales) $33,212 Cost of goods sold (same as Cost of sales) 23,029 Gross profit (same as Gross margin) 10,183 Expenses:

Selling, general, administrative 7,490

Operating Cycle of a Merchandising Business

Receivable Purchase and Cash Sale Purchase and Sale on Account

PeriodicInventory Systems

Adjust and close the accounts

of a merchandising business.

Objective 4

Book Inventory

Balance

$255,000

PhysicalCount

$252,500

$2,500 difference

Adjustments to Inventory

Example

Revenues Income

Summary C.G.S.

Prepare a merchandiser’s

financial statements.

Objective 5

Income Statement Formats

✔There are two basic formats for the income statement:

1 Multi-step

2 Single-step

Multi-Step Format

Sporting StoreIncome StatementYear Ended December 31, 2002

Sales revenue $2,760,000Sales discounts – 22,824Returns and allowances – 32,605Net sales revenue $2,704,571Cost of goods sold –1,490,400

Single-Step Format

Sporting StoreIncome StatementYear Ended December 31, 2005

Single-Step Format

Expenses:

Cost of goods sold $1,490,400Wage expense 166,285Rent expense 137,000Interest expense 1,000Insurance expense 16,302Depreciation expense 9,781Supplies expense 8,151Total expenses $1,828,919

Use the gross margin percentage

and the inventory turnover

ratio to evaluate a business.

Objective 6

Inventory turnover = Cost of goods sold

÷ Average inventory

Gross profit percentage = Gross profit

÷ Net sales revenue

Using the Financial Statements for Decision Making

Gross Profit on $1 for Three Merchandisers

Gross margin

$0.45

Gross margin

$0.42

Cost of goods sold

$0.55

Cost of goods sold

$0.58

Cost of goods sold

$0.79

Gross margin

Rate of Inventory Turnover for

5.4 times per year

2.3 times per year

End of Chapter

5