Financial accounting 12th warren duchac chapter 06

Accounting for Merchandising Businesses Chapter Student Version These Theseslides slidesshould shouldbe beviewed viewedusing usingthe thepresentation presentation mode mode(click (clickthe the icon icontotostart startpresentation) presentation) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University Learning Objective  Distinguish between the activities and financial statements of service and merchandising businesses © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Nature of Merchandising Businesses  Most service businesses, such as plumbing repair and accounting services, have no merchandise  Merchandising businesses, such as a department store or sandwich shop, generate revenue by selling a product  Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective  Distinguish between the activities and financial statements of service and merchandising businesses  Describe and illustrate the financial statements of a merchandising business © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Multiple-Step Income Statement  The multiple-step income statement contains several sections, subsections, and subtotals The first segment reports revenue from sales © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Multiple-Step Income Statement  Sales is the total amount charged customers for merchandise sold, including cash sales and sales on account  Sales returns and allowances are granted by the seller to customers for damaged or defective merchandise  Sales discounts are granted by the seller to customers for early payment of amounts owed  Net sales is determined by subtracting sales returns and allowances and sales discounts from sales © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Multiple-Step Income Statement  The second segment of the multiple-step income statement is the cost of merchandise sold section  The cost of merchandise sold is the cost of the merchandise sold to customers Merchandise costs consist of all the costs of acquiring the merchandise and readying it for sale, such as purchase and freight costs © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Multiple-Step Income Statement  The buyer may return merchandise to the seller (purchase return), or the buyer may receive a reduction in the initial price at which the merchandise was purchased (purchase allowance)  Sellers may offer customers sales discounts for early payment of their bills From the buyer’s perspective, such discounts are referred to as purchase discounts © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Multiple-Step Income Statement  If merchandise inventory at the end of the period is determined by taking a physical count of inventory on hand, a periodic inventory system is being used  Under the perpetual inventory system, the amounts of inventory purchased, available for sale, and sold are continuously (perpetually) updated in the inventory records © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Gross Profit  Gross profit is computed by subtracting the cost of merchandise sold from net sales Gross Profit © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Dual Nature of Merchandise Transactions Scully Company (Seller) Cash 4,000 Accounts Receivable—Burton Co 4,000 Burton Company (Buyer) Accounts Payable—Scully Co Cash 4,000 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 4,000 LO Dual Nature of Merchandise Transactions July 18 Scully Company sold merchandise on account to Burton Company, $12,000, terms FOB shipping point, 2/10, n/eom Scully prepaid transportation costs of $500, which were added to the invoice The cost of the merchandise sold was $7,200 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Dual Nature of Merchandise Transactions Scully Company (Seller) Accounts Receivable—Burton Co 12,000 Sales 12,000 Accounts Receivable—Burton Co 500 Cash 500 Cost of Merchandise Sold 7,200 Merchandise Inventory 7,200 Burton Company (Buyer) Merchandise Inventory 12,500 Accounts Payable—Scully Co 12,500 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Dual Nature of Merchandise Transactions July 28 Scully Company received payment from Burton Company for purchase of July 18, less discount (2% × $12,000) © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Dual Nature of Merchandise Transactions Scully Company (Seller) Cash 12,260 Sales Discounts 240 Accounts Receivable—Burton Co 12,500 Burton Company (Buyer) Accounts Payable—Scully Co Merchandise Inventory Cash 12,500 © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use 240 12,260 Learning Objective  Distinguish between the activities and financial statements of service and merchandising businesses  Describe and illustrate the financial statements of a merchandising business  Describe and illustrate the accounting for merchandising transactions including: sale of merchandise, purchase of merchandise; freight, sales taxes, and trade discounts; dual nature of merchandising transactions  Describe the adjusting and closing process for a merchandising business © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Adjusting Entry for Inventory Shrinkage  Merchandising businesses may experience some loss of inventory due to shoplifting, employee theft, or errors in recording or counting inventory  If the balance of the Merchandise Inventory account is larger than the total amount of the merchandise count, the difference is often called inventory shrinkage or inventory shortage © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Inventory Shrinkage At the end of the accounting period, Merchandise Inventory has a balance of $63,950 A physical count indicates that only $62,150 in inventory is on hand This inventory shrinkage of $1,800 is recorded by the following adjusting entry: © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Step 1: Closing Entries Debit each temporary account with a credit balance, such as Sales, for its balance and credit Income Summary © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Step 2: Closing Entries Credit each temporary account with a debit balance, such as an expense, for its balance and debit Income Summary © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Steps and 4: Closing Entries Debit Income Summary for the amount of its balance (net income) and credit the owner’s capital account Debit the owner’s capital account for the balance of the drawing account and credit the drawing account © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Learning Objective 5 Describe and illustrate the use of the ratio of net sales to assets in evaluating a company’s operating performance © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Ratio of Net Sales to Assets  The ratio of net sales to assets measures how effectively a business is using its assets to generate sales Ratio of Net Net Sales Sales to = Average Total Assets Assets © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use LO Ratio of Net Sales to Assets  The ratio of net sales to assets (in millions) for Dollar Tree, Inc for each year are as follows: © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use Accounting for Merchandising Businesses The End Student Version Prepared by: C Douglas Cloud Professor Emeritus of Accounting Pepperdine University © 2011 Cengage Learning All Rights Reserved May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use ... activities and financial statements of service and merchandising businesses  Describe and illustrate the financial statements of a merchandising business  Describe and illustrate the accounting. .. Objective  Distinguish between the activities and financial statements of service and merchandising businesses  Describe and illustrate the financial statements of a merchandising business ©... sandwich shop, generate revenue by selling a product  Merchandise on hand (not sold) at the end of an accounting period is called merchandise inventory © 2011 Cengage Learning All Rights Reserved May