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After completing this chapter you should be able to: Describe merchandising activities and identify income components for a merchandising company, identify and explain the inventory asset and cost flows of a merchandising company, compute the acid-test ratio and explain its use to assess liquidity,...
Chapter Accounting for Merchandising Operations PowerPoint Authors: Susan Coomer Galbreath, Ph.D., CPA Charles W Caldwell, D.B.A., CMA Jon A Booker, Ph.D., CPA, CIA Cynthia J Rooney, Ph.D., CPA Winston Kwok, Ph.D., CPA McGrawHill/Irwin Copyright © 2011 by The McGrawHill Companies, Inc. All rights reserved 5 2 C 1 Service Companies Service organizations sell time to earn revenue Examples: Accounting firms, law firms and Examples: Accounting firms, law firms and plumbing services plumbing services 5 3 C 1 Merchandiser Merchandising Companies Manufacturer Wholesaler Retailer Consumers C 1 Reporting Income for a Merchandiser Merchandising companies sell products to earn revenue Examples: sporting goods, clothing, and auto parts stores 5 4 C 2 Operating Cycle for a Merchandiser Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise 5 5 5 6 C 2 Inventory Systems 5 7 C 2 Inventory Systems Perpetual systems continually update accounting records for merchandising transactions Periodic systems accounting records relating to merchandise transactions are updated only at the end of the accounting period 5 8 P1 Merchandise Purchases On November 2, Z-Mart purchased $1,200 of merchandise inventory for cash 5 9 P1 Trade Discounts Used by manufacturers and wholesalers to offer better prices for greater quantities purchased Example Example Z-Mart Z-Mart offers offers aa 30% 30% trade trade discount discount for for orders orders of of 1,000 1,000 units units or or more more on on its its popular popular product product Racer Racer Each Each Racer Racer has has aa list list price price of of $5.25 $5.25 5 10 P1 Accounting for Merchandise Purchases 5 27 P2 Sales Returns and Allowances Sales returns and allowances usually involve dissatisfied customers and the possibility of lost future sales Sales returns refer to merchandise that customers return to the seller after a sale Sales allowances refer to reductions in the selling price of merchandise sold to customers 5 28 P2 Sales Returns and Allowances Recall Z-Mart’s sale for $2,400 that had a cost of $1,600 Assume the customer returns part of the merchandise The returned items sell for $800 and cost $600 5 29 P2 Sales Allowances Assume that $800 of the merchandise Z-Mart sold on November is defective but the buyer decides to keep it because Z-Mart offers a $100 price reduction 5 30 Merchandising Cost Flow in the Accounting Cycle P2 Period Period Beginning inventory Net purchases Merchandise available for sale Ending inventory Cost of goods sold Beginning inventory Net purchases To Income Statement To Balance Sheet Merchandise available for sale Ending inventory Cost of goods sold To Income Statement To Balance Sheet P3 Adjusting Entries for Merchandisers A merchandiser using a perpetual inventory system is usually required to make an adjustment to update the Merchandise Inventory account to reflect any loss of merchandise, including theft and deterioration Z-Mart’s Merchandise Inventory account at the end of year 2011 has a balance of $21,250, but a physical count reveals that only $21,000 of inventory exists 5 31 5 32 P3 Closing Entries for Merchandisers 5 33 P4 Income Statement An income statement format shows net sales and other costs and expenses 5 34 P4 Classified Balance Sheet Highly Liquid Less Liquid 5 35 A1 Acid-Test Ratio Acid-Test = Ratio Cash + S-T Investments + Receivables Current Liabilities A common rule of thumb is the acid-test ratio should have a value of at least 1.0 to conclude a company is unlikely to face liquidity problems in the near future 5 36 A2 Gross Margin Ratio Percentage Percentage of of dollar dollar sales sales available available to to cover cover expenses expenses and and provide provide aa profit profit 5 37 A1/A2 Nestlé P5 Appendix 5A: Periodic Inventory System 5 38 (a) (b) (c) (d) (e) (f) (g) A periodic inventory system requires updating the inventory account only at the end of a period to reflect the quantity and cost of both the goods available and the goods sold 5 39 P5 Appendix 5A: Periodic Inventory System 5 40 P5 APPENDIX 5B: WORKSHEET—PERPETUAL SYSTEM 5 41 END OF CHAPTER ... for greater quantities purchased Example Example Z-Mart Z-Mart offers offers aa 30% 30% trade trade discount discount for for orders orders of of 1,000 1,000 units units or or more more on on... Z-Mart purchased merchandise on terms of FOB shipping point The transportation charge is $75 5 21 P1 Accounting for Merchandise 5 22 P2 Accounting for Merchandise Sales 5 23 P2 Sales of. .. transaction for a seller of merchandise involves two parts: Revenue received in the form of an asset from a customer Recognition of the cost of merchandise sold to a customer 5 24 P2 Sales of Merchandise