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Merchandising Operations and the Accounting Cycle. Chapter 5. Income Statements. Merchandising Co. Income Statement Year ended June 30, 20xx Sales revenue $xxx Cost of goods sold x Gross profit xx Operating expenses: Salary expense x

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Merchandising operations and the accounting cycle

Merchandising Operationsand the Accounting Cycle

Chapter 5


Income statements
Income Statements

Merchandising Co.

Income Statement

Year ended June 30, 20xx

Sales revenue $xxx

Cost of goodssold x

Gross profitxx

Operating expenses:

Salary expense x

Depreciation expense x

Net income $ xx

Service Co.

Income Statement

Year ended June 30, 20xx

Service revenue $xxx

Expenses:

Salary expense x

Depreciation expense x

Income tax expense x

Net income $ xx


Objective 1

Account for the purchase

of inventory.

Objective 1


Purchase of inventory
Purchase of Inventory

Suppliers

send

merchandise

and a bill

Merchant

prepares

purchase

order

Compares


Purchase of inventory example
Purchase of Inventory Example

  • On May 1, the Sporting Store acquired on account $2,000 of various items for resale.

  • The supplier sent the merchandise along with a bill stating the quantity, price, and terms of sale.

  • What is the journal entry?


Purchase of inventory example1

May 1

Inventory $2,000 Accounts Payable $2,000 Purchased inventory on account

Inventory Accounts Payable 2,000 2,000

Purchase of Inventory Example


Recording purchase returns and allowances example
Recording Purchase Returnsand Allowances Example

  • Assume that on May 4 a $100 item was returned prior to payment of the invoice.

  • What is the journal entry?

May 4

Accounts Payable 100

Inventory 100

Merchandise was returned


Recording purchase returns and allowances example1
Recording Purchase Returnsand Allowances Example

  • Assume that one of the items of merchandise is slightly damaged, and the store was given a $10 allowance.

  • What is the journal entry?

May 4

Accounts Payable 10

Inventory 10

Received a purchase allowance


Recording purchase returns and allowances example2
Recording Purchase Returnsand Allowances Example

Accounts Payable

Inventory

2,000 100

10

100 2,000

10

Bal. 1,890

Bal. 1,890


Purchase discounts
Purchase Discounts

  • Credit terms are stated in expressions such as:

  • 2/10, N/30, meaning that a discount of 2% is allowed if the invoice is paid within 10 days; otherwise the full (net) amount is due within 30 days.


Purchase discounts example
Purchase Discounts Example

  • Assume the Sporting Store purchased merchandise for $1,000 with terms of 2/10, N/30.

  • The store paid within the discount period.

  • The 2% discount ($20) is deducted from the amount due ($1,000) and $980 is remitted.


Purchase discounts example1
Purchase Discounts Example

  • What is the journal entry?

Accounts Payable 1,000

Cash 980

Inventory 20

To record payment of invoice within the

discount period


Recording transportation costs
Recording Transportation Costs

  • Transportation costs are the cost of moving inventory from seller to buyer.

  • FOB stands for Free on Board and governs the passing of title of the goods.

  • Selling/buying agreements usually specify FOB terms.


Recording transportation costs1
Recording Transportation Costs

FOB Shipping Point

FOB Destination


Freight charges example
Freight Charges Example

  • Assume that on May 9 the Sporting Store paid $60 for freight.

  • What is the journal entry?

May 9

Inventory 60

Cash 60

Paid a freight bill


Objective 2
Objective 2

Account for the sale of inventory


Sale of inventory
Sale of inventory

  • The amount a business earns from selling merchandise is called sales revenue

  • Inventory that has been sold to customers is called cost of goods sold


Sporting store example
Sporting Store Example

  • Assume that on May 11 the store sold merchandise costing $1,800 for $2,600 in cash.

  • What are the journal entries?


Sporting store example1
Sporting Store Example

May 11

Cash 2,600

Sales Revenue 2,600

To record sale of merchandise

May 11

Cost of Goods Sold 1,800

Inventory 1,800

To record the cost of merchandise sold


Sporting store example2
Sporting Store Example

  • On May 15, the store sold to Maria Gym $5,000 worth of merchandise with a cost of $3,000.

  • Terms are 2/10, N/30.

Invoice Maria Gym Terms 2/10, N/30 Total $5,000


Sales discounts and sales returns and allowances example
Sales Discounts and Sales Returns and Allowances Example

  • On May 17, Maria Gym returned $1,500 worth of goods that cost $900.

  • In addition, a credit of $100 was allowed for merchandise that was damaged.

  • What are the journal entries?


Sales discounts and sales returns and allowances example1
Sales Discounts and Sales Returns and Allowances Example

May 17

Sales Returns and Allowance 1,500

Accounts Receivable 1,500

Received returned merchandise

May 17

Inventory 900

Cost of Goods Sold 900

Returned goods to inventory


Sales discounts and sales returns and allowances example2
Sales Discounts and Sales Returns and Allowances Example

  • There is no entry required for inventory since the goods were not returned.

May 17

Sales Returns and Allowance 100

Accounts Receivable 100

Credit granted for damaged goods


Sales discounts and sales returns and allowances example3
Sales Discounts and Sales Returns and Allowances Example

  • On May 20, the store received a check from Maria Gym for the balance due.

  • What is the balance due?

Accounts Receivable May 15 = $5,000

Less May 17 returns and allowances $1,600

Equals May 20 balance due of $3,400


Sales discounts and sales returns and allowances example4
Sales Discounts and Sales Returns and Allowances Example

  • Maria took advantage of the sales terms – 2/10, N/30.

May 20

Cash 3,332

Sales Discounts 68

Accounts Receivable 3,400

Cash collected within the discount period


Objective 3

Use sales and gross profit

to evaluate a company.


Sales Revenue

Net sales

=

Sales Revenue less Sales Returns and Sales Discounts


Gross Profit or Gross Margin

Target Corporation

Income Statement (Adapted)

Year Ended December 31, 2000

Millions

Net sales revenue (same as Net sales) $33,212

Cost of goods sold (same as Cost of sales) 23,029

Gross profit (same as Gross margin) 10,183

Expenses:

Selling, general, administrative 7,490

Depreciation expense 854

Interest expense 393

Other expenses, net 302

Total operating expenses 9,039

Net earnings (same as Net income) $ 1,144


Operating Cycle of a Merchandising Business

Purchase and Cash Sale

Purchase and Sale on Account

Cash

Cash

Collections

o f Cash

Purchases

Purchases

Cash Sales

Accounts

Receivable

Inventory

Sales on Account

Inventory


Inventory Systems

Perpetual

Periodic



Adjustments to inventory example
Adjustments to Inventory Example

Book Inventory

Balance

$255,000

Physical

Count

$252,500

$2,500 difference


Adjustments to inventory example1
Adjustments to Inventory Example

  • What is the journal entry?

December 31

Cost of Goods Sold 2,500

Inventory 2,500

To adjust inventory to physical count


Closing entries for a merchandising business
Closing Entries for a Merchandising Business

Revenues

Income

Summary

2,760,000

7,348

2,767,348

1,884,348

C.G.S.

883,000

1,490,400

Sales Discount

22,824

Returns and A.

Capital

Account

32,605

Other Exp.

883,000

338,519


Objective 5

Prepare a merchandiser’s

financial statements.

Objective 5


Income statement formats
Income Statement Formats

  • There are two basic formats for the income statement:

  • Multi-step

  • Single-step


Multi step format
Multi-Step Format

Sporting Store

Income Statement

Year Ended December 31, 2002

Sales revenue $2,760,000

Sales discounts – 22,824

Returns and allowances – 32,605

Net sales revenue $2,704,571

Cost of goods sold –1,490,400

Gross margin $1,214,171


Multi step format1
Multi-Step Format

Gross margin $1,214,171

Operating expenses:

Wage expense – 166,285

Rent expense – 137,000

Insurance expense – 16,302

Depreciation expense – 9,781

Supplies expense – 8,151

Operating income $ 876,652


Multi step format2
Multi-Step Format

Operating income $876,652

Other revenue and expenses:

Interest revenue 7,348

Interest expense – 1,000

Net income $883,000


Single step format
Single-Step Format

Sporting Store

Income Statement

Year Ended December 31, 2005

Revenues:

Net sales (net of sales discounts) $2,704,571

Interest revenue 7,348

Total revenues $2,711,919


Single step format1
Single-Step Format

Expenses:

Cost of goods sold $1,490,400

Wage expense 166,285

Rent expense 137,000

Interest expense 1,000

Insurance expense 16,302

Depreciation expense 9,781

Supplies expense 8,151

Total expenses $1,828,919

Net income $ 883,000


Objective 6

Use the gross margin percentage

and the inventory turnover

ratio to evaluate a business.

Objective 6


Using the financial statements for decision making
Using the Financial Statements for Decision Making

Gross profit percentage = Gross profit

÷ Net sales revenue

Inventory turnover = Cost of goods sold

÷ Average inventory


Gross profit on 1 for three merchandisers
Gross Profit on $1 for Three Merchandisers

$1.00 —

$0.75 —

$0.50 —

$0.25 —

$0.00

Gross

margin

$0.45

Gross

margin

$0.21

Gross

margin

$0.42

Cost of

goods sold

$0.79

Cost of

goods sold

$0.58

Cost of

goods sold

$0.55

Austin

Sound

Target

Corporation

Wal-Mart

Stores, Inc.


Rate of inventory turnover for three merchandisers
Rate of Inventory Turnover for Three Merchandisers

Wal-Mart Stores, Inc.

7.0 times

per year

1

2

3

4

5

6

7

Target Corporation

5.4 times

per year

1

2

3

4

5

Austin Sound

2.3 times

per year

1

2

Jan Mar Jun Sep Dec



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