Chapter 5-1 Chapter Accounting for Merchandising Operations Chapter 5-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives Identify the differences between service and merchandising companies Explain the recording of purchases under a perpetual inventory system Explain the recording of sales revenues under a perpetual inventory system Explain the steps in the accounting cycle for a merchandising company Distinguish between a multiple-step and a single-step income statement Explain the computation and importance of gross profit Chapter 5-3 Accounting Accounting for for Merchandising Merchandising Operations Operations Merchandising Operations Operating cycles Flow of costs —perpetual and periodic inventory systems Chapter 5-4 Recording Purchases of Merchandise Recording Sales of Merchandise Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions Sales returns and allowances Sales discounts Completing the Accounting Cycle Adjusting entries Closing entries Summary of merchandising entries Forms of Financial Statements Multiple-step income statement Single-step income statement Classified balance sheet Merchandising Merchandising Operations Operations Merchandising Companies Buy and Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as sales revenue or sales Chapter 5-5 SO Identify the differences between service and merchandising companies Merchandising Merchandising Operations Operations Income Measurement Sales Revenue Less Not used in a Service business Illustration 5-1 Cost of Goods Sold Equals Gross Profit Cost of goods sold is the total cost of merchandise sold during the period Chapter 5-6 Less Operating Expenses Equals Net Income (Loss) SO Identify the differences between service and merchandising companies Operating Operating Cycles Cycles The operating cycle of a merchandising company ordinarily is longer than that of a service company Chapter 5-7 Illustration 5-2 SO Identify the differences between service and merchandising companies Flow Flow of of Costs Costs Perpetual System Features: Purchases increase Merchandise Inventory Freight costs, Purchase Returns and Allowances and Purchase Discounts are included in Merchandise Inventory Cost of Goods Sold is increased and Merchandise Inventory is decreased for each sale Physical count done to verify Merchandise Inventory balance The perpetual inventory system provides a continuous record of Merchandise Inventory and Cost of Goods Sold Chapter 5-8 SO Identify the differences between service and merchandising companies Flow Flow of of Costs Costs Periodic System Features: Purchases of merchandise increase Purchases Ending Inventory determined by physical count Calculation of Cost of Goods Sold: Beginning inventory $ 100,000 Add: Purchases, net Chapter 5-9 800,000 Goods available for sale SO Identify the differences between service and merchandising companies Recording Recording Purchases Purchases of of Merchandise Merchandise Illustration 5-5 Made using cash or credit (on account) Normally recorded when goods are received Purchase invoice should support each credit purchase Chapter 5-10 SO Explain the recording of purchases under a perpetual inventory system Forms Forms of of Financial Financial Statements Statements SingleStep Chapter 5-43 Illustration 5-14 SO Distinguish between a multiple-step and a single-step income statement Forms Forms of of Financial Financial Statements Statements Classified Balance Sheet Chapter 5-44 Illustration 5-15 SO Distinguish between a multiple-step and a single-step income statement Periodic Periodic Inventory Inventory System System Periodic System Separate accounts used to record purchases, freight costs, returns, and discounts Company does not maintain a running account of changes in inventory Ending inventory determined by physical count Chapter 5-45 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Periodic Periodic Inventory Inventory System System Calculation of Cost of Goods Sold Illustration 5A-1 $316,000 Chapter 5-46 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Purchases Purchases under under Periodic Periodic System System Illustration: On the basis of the sales invoice (Illustration 5-5) and receipt of the merchandise ordered from PW Audio Supply, Sauk Stereo records the $3,800 purchase as follows May Purchases 3,800 Accounts payable Chapter 5-47 3,800 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Purchases Purchases under under Periodic Periodic System System Freight Costs Illustration: If Sauk pays Haul-It Freight Company $150 for freight charges on its purchase from PW Audio Supply on May 6, the entry on Sauk’s books is: May Freight-in (Transportation-in) Cash Chapter 5-48 150 150 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Purchases Purchases under under Periodic Periodic System System Purchase Returns and Allowances Illustration: Sauk Stereo returns $300 of goods to PW Audio Supply and prepares the following entry to recognize the return May Accounts payable 300 Purchase returns and allowances 300 Chapter 5-49 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Purchases Purchases under under Periodic Periodic System System Purchase Discounts Illustration: On May 14 Sauk Stereo pays the balance due on account to PW Audio Supply, taking the 2% cash discount allowed by PW Audio for payment within 10 days Sauk Stereo records the payment and discount as follows May 14 Accounts payable Purchase discounts Cash Chapter 5-50 3,500 70 3,430 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Sales Sales under under Periodic Periodic System System Illustration: PW Audio Supply, records the sale of $3,800 of merchandise to Sauk Stereo on May (sales invoice No 731, Illustration 5-5) as follows May Accounts receivable Sales 3,800 3,800 No entry is recorded for cost of goods sold at the time of the sale under a periodic system Chapter 5-51 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Sales Sales under under Periodic Periodic System System Sales Returns and Allowances Illustration: To record the returned goods received from Sauk Stereo on May 8, PW Audio Supply records the $300 sales return as follows May Sales returns and allowances Accounts receivable Chapter 5-52 300 300 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Recording Recording Sales Sales under under Periodic Periodic System System Sales Discounts 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 account receivable in full as follows May 14 Cash 3,430 Sales discounts Accounts receivable Chapter 5-53 70 3,500 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Comparison Comparison of of Entries—Perpetual Entries—Perpetual Vs Vs Periodic Periodic Illustration 5A-2 Chapter 5-54 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Comparison Comparison of of Entries—Perpetual Entries—Perpetual Vs Vs Periodic Periodic Illustration 5A-2 Chapter 5-55 SO Explain the recording of purchases and sales of inventory under a periodic inventory system Worksheet Worksheet for for aa Merchandising Merchandising Company Company Illustration 5B-1 Chapter 5-56 Copyright Copyright “Copyright © 2009 John Wiley & Sons, Inc All rights reserved Reproduction or translation of this work beyond that permitted in Section 117 of the 1976 United States Copyright Act without the express written permission of the copyright owner is unlawful Request for further information should be addressed to the Permissions Department, John Wiley & Sons, Inc The purchaser may make back-up copies for his/her own use only and not for distribution or resale The Publisher assumes no responsibility for errors, omissions, or damages, caused by the use of these programs or from the use of the information contained herein.” Chapter 5-57 .. .Chapter Accounting for Merchandising Operations Chapter 5-2 Accounting Principles, Ninth Edition Study Study Objectives Objectives... the accounting cycle for a merchandising company Distinguish between a multiple-step and a single-step income statement Explain the computation and importance of gross profit Chapter 5-3 Accounting. .. 5-3 Accounting Accounting for for Merchandising Merchandising Operations Operations Merchandising Operations Operating cycles Flow of costs —perpetual and periodic inventory systems Chapter 5-4