Lesson 6 accounting for merchandising activities
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Lesson 6 Accounting for Merchandising Activities. Task Team of FUNDAMENTAL ACCOUNTING School of Business, Sun Yat-sen University. Outline. Merchandising activities Operating cycle of merchandising companies Merchandising cost accounts Inventory systems Merchandise purchases

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Lesson 6 accounting for merchandising activities

Lesson 6 Accounting for Merchandising Activities

Task Team of

FUNDAMENTAL ACCOUNTING

School of Business, Sun Yat-sen University


Outline

Outline

Merchandising activities

Operating cycle of merchandising companies

Merchandising cost accounts

Inventory systems

Merchandise purchases

Sales transactions

Adjusting and closing entries


Introduction

Introduction

  • Scandals in stock market occur now and then. Among them, financial frauds or income manipulation are common. Income manipulation typically starts from making up sales revenues as well as purchases, for example, GuangXia (Yinchuan).

  • In this lesson you are required to think about,

    • Why these income statement numbers are so important?

    • How they are recorded in accounting system?


Merchandising activities

Merchandising Activities

Merchandising Companies

Manufacturer

Wholesaler

Retailer

Customer


Reporting financial performance

Revenues

Expenses

Netincome

Reporting Financial Performance

  • Service organizations sell time to earn revenue.

    • Examples: accounting firms, law firms, and plumbing services


Reporting financial performance1

NetSales

Cost ofGoods Sold

GrossProfit

Expenses

NetIncome

Reporting Financial Performance

  • Merchandising companies sell merchandise to earn revenue.

    • Examples: sporting goods, clothing, and auto parts stores


Operating cycle of merchandise companies

Credit Sale

Cash Sale

Cashcollection

Purchases

Purchases

Cashsales

Accountreceivable

Merchandiseinventory

Merchandiseinventory

Credit sales

Operating Cycle of Merchandise Companies

  • Begins with the purchase of merchandise and ends with the collection of cash from the sale of merchandise.


Merchandising cost accounts

+

Beginning inventoryYear 1

Net cost ofpurchases

Merchandiseavailable for sale

=

+

Cost of GoodsSold

Income Statement

Ending InventoryYear 1

Becomes beginning inventory of Year 2

BalanceSheet

Merchandising Cost Accounts


Inventory systems

Inventory Systems

Perpetual MethodGives a continual record of the amount of inventory on hand. When an item is sold it is recorded in the Cost of Goods Sold account.

Periodic MethodRequires updating the inventory account only at the end of the period. Acquisition of merchandise inventory is recorded in a temporary Purchases account.


Inventory systems1

Inventory Systems

  • Perpetual provides a continuous record of:

    • The amount of inventory on hand.

    • Cost of goods sold to date.

  • Periodic requires a physical count of goods to determine:

    • The amount of inventory on hand.

    • Cost of goods sold.


Comparison of perpetual and periodic systems

Comparison of Perpetual and Periodic Systems


Comparison of periodic and perpetual systems

Comparison of Periodic and Perpetual Systems


Comparison of periodic and perpetual systems1

Comparison of Periodic and Perpetual Systems


Lesson 6 accounting for merchandising activities

Merchandise Purchases

  • The operating cycle of merchandise companies involves the purchase and subsequent sale of merchandise inventory.

  • Purchase of inventory can either on account or by cash.

Oct. 1 Inventory 5,000

Accounts Payable/cash5,000

Purchased inventory.


Trade discounts

Trade Discounts

Trade discounts are used by manufacturers and wholesalers to change selling prices without republishing their catalogs.

Example

MarCo, Inc. offers a 20% trade

discount on orders of 100

units or more of their popular

product Racer. Each Racer

has a list price of $5.00.


Lesson 6 accounting for merchandising activities

Terms

Time

Due

Credit Period = 30 days

Discount Period = 10 days

Oct.11

Oct.31

Oct.1

(Full amount minus 2% discount) due between Oct.1 and Oct.11

Full amount due anytime between Oct.12 and Oct.31

Purchase

Purchase Discounts

Purchase discount is a deduction from the invoice price granted to induce early payment of the amount due. Example – 2/10, n30


Purchase discounts

Number of Days Discount Is Available

Otherwise, Net (or All) Is Due

Discount Percent

CreditPeriod

Purchase Discounts

2/10,n/30


Lesson 6 accounting for merchandising activities

Case 1-Discount taken

Oct.11 Accounts Payable4,000

Inventory 80

Cash 3,920

2% x (5,000 - 1,000) = 80

Case 2-Discount not taken

Oct.31 Accounts Payable4,000

Cash 4,000

Purchase Discounts

Assume the purchase of $4,000 inventory on October 1 was on the terms 2/10,n30.


Managing discounts

Percent

paid to

keep

money

Days

in a

year

Number

of additional

days before

payment

Managing Discounts

Failing to take a 2/10, n/30 discount is really expensive!

365 days ÷ 20 days × 2% = 36.5% annual rate


Purchase returns and allowances

Purchase Returns and Allowances

  • Purchase Return . . .

    • Merchandise returned by the purchaser to the supplier.

  • Purchase Allowance . . .

    • A reduction in the cost of defective merchandise received by a purchaser from a supplier.

Purchase Returns and Allowances

Accounts PayableXXX

Inventory XXX

Defective merchandise returned to supplier.


Purchase returns and allowances1

Purchase Returns and Allowances

On Nov. 1, Helo Inc. purchased $10,000 of Merchandise Inventory on account, credit terms are 2/10, n/30.


Purchase returns and allowances2

Purchase Returns and Allowances

On Nov 5, Helo Inc. returned $250 of defective merchandise to the supplier.


Purchase returns and allowances3

Purchase Returns and Allowances

On Nov 9, Helo Inc. paid the amount owed for the purchase of Nov 1.


Transportation costs

Transportation Costs

Transportation Charges

  • Inventory XXX

  • Accounts Payable XXX

    • Transportation charges on goods purchased FOB shipping point.


Recording purchases information

Recording Purchases Information

2011


Sales transactions

Sales Transactions

  • For a business engaged in a merchandising activity, revenue takes the form of sales.

  • The entry to record the sale of merchandise on credit under a perpetual inventory system requires two entries

  • On March 10, TomCom sold $20,000 of merchandise on account. The merchandise was carried in inventory at a cost of $16,000.


Sales discounts

On May 8, Joye Co. sold merchandise costing $3,000 for $5,000 on account. Credit terms were 2/10, n/30.

Sales Discounts

  • A sales discount is a cash discount taken by customers against an amount owed to the seller.


Sales discounts1

Sales Discounts

  • On May 17, Joye Co. received a check for $4,900 in full payment of the May 8 sale.


Sales returns and allowances

Sales Returns and Allowances

  • On May 12, Joye Co. sold merchandise costing $4,000 for $6,000 on account The credit terms were 2/10, n/30.


Sales returns and allowances1

On May 14, merchandise with a sales price of $600 and a cost of $400 was returned to Joye Co. The return is related to the May 12 sale.

Sales Returns and Allowances


Sales returns and allowances2

On May 20, Joye received the amount owed to it from the sale of May 12.

Sales Returns and Allowances


Recording sales information

Sales discounts and returns and allowances

are Contra Revenue accounts.

Recording Sales Information


Adjustments perpetual inventory

Adjustments-Perpetual Inventory

Perpetual inventory systems keep a running total of inventory levels by recording sales and purchase transactions.

Periodic adjustments must be made to account for shrinkage (loss due to theft or deterioration of inventory).


Lesson 6 accounting for merchandising activities

Adjustments-Perpetual Inventory

  • Oct.31 Cost of Goods Sold 3,800

  • Inventory 3,800

    • To record inventory shrinkage revealed by physical count.

Inventory per accounting records: $198,000

Inventory per physical count: $194,200

Difference (shrinkage) $3,800

Adjustment required:


Closing entries perpetual system

Closing Entries – Perpetual System

  • The closing process is similar for merchandising and service companies.

    Merchandising companies have additional temporary accounts that must be closed.

    These include:

    • Sales

    • Sales Returns & Allowances

    • Sales Discounts

    • Cost of Goods Sold


Discussion case

Discussion Case

  • CIMC

  • CIMC is the number one stock in China, mainly due to its “excellent” operating performance. However, in early 2005, the operating performance of CIMC was challenged. Analysts argued that, the surprisingly high operating performance is questionable. Specifically, abnormal growth was found in the following items,

    • Sales revenue

    • Gross profits

    • Accounts receivable

    • Inventory

      However, no growth was found in cash collected from customers.


Discussion case1

Discussion Case

  • Required:

    • How to calculate the growth rates in sales, gross profits, inventory, accounts receivables, and cash?

    • Are there are relationships between the above items?

    • How to verify the growth in above items?


Summary

Summary

The operating cycle of merchandise companies begins with the purchase of merchandise and end with the collection of cash from the sale of merchandise.

Perpetual method and period method are two inventory systems. Today perpetual method is more and more adopted.

Accounting for merchandise purchases records purchases, trade discount, cash discounts, purchase returns and allowance, transportation costs.

Accounting for sales transactions records sales, sales discount, sales returns and allowance, etc.

Under perpetual inventory system, adjustments must be made for shrinkage at the end of period.

Closing entries transfers balances in sales, sales returns and allowance, sales discounts and cost of goods sold into income summary account.


The end of lesson 6

The End of Lesson 6


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