chap 5
Chapter Chapter Accounting for Merchandising Operations Financial Accounting, Sixth Edition Chapter 5-1 Study Objectives Study 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 Determine cost of goods sold under a periodic system Chapter 5-2 Accounting for Merchandising Operations Accounting for Merchandising Operations Merchandising Merchandising Operations Operations Operating cycles Inventory systems— perpetual and periodic Chapter 5-3 Recording Recording Purchases of Purchases of Merchandise Merchandise Recording Recording Sales of Sales of Merchandise Merchandise Completing the Completing the Accounting Accounting Cycle Cycle Freight costs Purchase returns and allowances Purchase discounts Summary of purchasing transactions Sales returns and allowances Sales discounts Adjusting entries Closing entries Summary of merchandising entries Forms of Forms of Financial Financial Statements Statements Multiple-step income statement Single-step income statement Classified balance sheet Determining cost of goods sold under a periodic system Merchandising Operations Merchandising Operations Merchandising Companies Buy and Sell Goods Wholesaler Retailer Consumer The primary source of revenues is referred to as sales revenue or sales Chapter 5-4 SO Identify the differences between service and merchandising companies Merchandising Operations Merchandising Operations Income Measurement Sales Revenue Less Cost of Goods Sold Not used in a Service business Equals Cost of goods sold is the total cost of merchandise sold during the period Chapter 5-5 Gross Profit Illustration 5-1 Less Operating Expenses Equals Net Income (Loss) SO Identify the differences between service and merchandising companies Operating Cycles Operating Cycles Illustration 5-2 The operating cycle of a merchandising company ordinarily is longer than that of a service company Chapter 5-6 SO Identify the differences between service and merchandising companies Inventory Systems Inventory Systems 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 Inventory balance The perpetual inventory system provides a continuous record of Inventory and Cost of Goods Sold Chapter 5-7 SO Identify the differences between service and merchandising companies Inventory Systems Inventory Systems 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 5-8 800,000 Goods available for sale SO Identify the differences between service and merchandising companies Recording Purchases of Merchandise Recording Purchases of Merchandise Made using cash or credit (on account) Illustration 5-4 Normally recorded when goods are received Purchase invoice should support each credit purchase Chapter 5-9 SO Explain the recording of purchases under a perpetual inventory system Recording Purchases of Merchandise Recording Purchases of Merchandise E5-2 Information related to Steffens Co is presented below Prepare the journal entry to record the transaction under a perpetual inventory system On April 5, purchased merchandise from Bryant Company for $25,000 terms 2/10, net/30, FOB shipping point April Chapter 5-10 Merchandise inventory Accounts payable 25,000 25,000 SO Explain the recording of purchases under a perpetual inventory system Forms of Financial Statements Forms of Financial Statements Multiple-Step Income Statement Shows several steps in determining net income Two steps relate to principal operating activities Distinguishes between operating and nonoperating activities Chapter 5-38 SO Distinguish between a multiple-step and a single-step income statement Forms of Forms of Financial Financial Statements Statements Illustration 5-11 Key Items: Net sales Gross profit Gross profit rate Chapter 5-39 Illustration 5-8 SO Distinguish between a multiple-step and a single-step income statement SO Explain the computation and importance of gross profit Forms of Forms of Financial Financial Statements Statements Illustration 5-11 Key Items: Net sales Gross profit Gross profit rate Operating expenses Chapter 5-40 SO Distinguish between a multiple-step and a single-step income statement Forms of Forms of Financial Financial Statements Statements Illustration 5-11 Key Items: Net sales Gross profit Gross profit rate Operating expenses Nonoperating activities Net income Chapter 5-41 SO Distinguish between a multiple-step and a single-step income statement Forms of Financial Statements Forms of Financial Statements Review Question The multiple-step income statement for a merchandiser shows each of the following features except: a b cost of goods sold c a sales revenue section d Chapter 5-42 gross profit investing activities section SO Distinguish between a multiple-step and a single-step income statement Forms of Financial Statements Forms of Financial Statements Single-Step Income Statement Subtract total expenses from total revenues Two reasons for using the single-step format: 1) Company does not realize any type of profit until total revenues exceed total expenses 2) Format is simpler and easier to read Chapter 5-43 SO Distinguish between a multiple-step and a single-step income statement Forms of Financial Statements Forms of Financial Statements SingleStep Chapter 5-44 Illustration 5-12 SO Distinguish between a multiple-step and a single-step income statement Forms of Financial Statements Forms of Financial Statements Classified Balance Sheet Chapter 5-45 Illustration 5-13 SO Distinguish between a multiple-step and a single-step income statement Determining Cost of Goods Sold Under a Determining Cost of Goods Sold Under a Periodic System Periodic 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 5-46 SO Determine cost of goods sold under a periodic system Determining Cost of Goods Sold Under a Determining Cost of Goods Sold Under a Periodic System Periodic System Calculation of Cost of Goods Sold Illustration 5-14 $316,000 Chapter 5-47 SO Determine cost of goods sold under a periodic system All About You All About You When Is a Sale a Sale? “When is a sale not really a sale?” “Why does it matter?” Some Facts: In early 2005 the shareholders of Krispy Kreme Doughnuts filed a lawsuit against management, alleging the company was shipping twice as many doughnuts to wholesale customers than ordered Chapter 5-48 The SEC investigated claims that Harley-Davidson was shipping motorcycles to dealers in excess of dealer requests, to give appearance of strong sales All About You All About You When Is a Sale a Sale? Some Facts: In a recent lawsuit settlement, pharmaceutical company Bristol-Myers Squibb paid a $150 million fine for an alleged channel stuffing scheme An SEC investigation concluded that The Coca-Cola Company shipped $1.2 of excessive beverage concentrate to bottlers in Japan during a three-year period The bottlers’ inventories surged 62% during this time, while their sales increased only 11% Chapter 5-49 All About You All About You Chart to illustrate that revenue recognition issues often require companies to correct—restate—their financial statements Source: Terry Baldwin and Daniel Yoo, Restatements— Traversing Shaky Ground: An Analysis for Investors,” Glass Lewis & Co., June 2, 2005, p 9, Graph Chapter 5-50 All About You All About You What Do You Think? “Is channel stuffing an ethical business practice?” YES: Motorcycles and pharmaceuticals can’t be sold if they are sitting in the manufacturer’s warehouse X Chapter 5-51 NO: If goods are intentionally shipped to customers when the customer hasn’t requested them, and the seller has a high expectation that the goods will be returned, then this clearly is not a real sale Copyright Copyright “Copyright © 2008 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 5-52 ... under a periodic system Chapter 5-2 Accounting for Merchandising Operations Accounting for Merchandising Operations Merchandising Merchandising Operations Operations Operating cycles Inventory... the accounting cycle for a merchandising company Completing the Accounting Cycle Completing the Accounting Cycle Closing Entries Close all accounts that affect net income E5-8 Presented is information... for inventory (b) Prepare the necessary closing entries Chapter 5-35 SO Explain the steps in the accounting cycle for a merchandising company Completing the Accounting Cycle Completing the Accounting